Q1 2024 Northrop Grumman Corp Earnings Call
Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman's first quarter 2024 conference call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode.
Good day, ladies and gentlemen, and welcome to Northrop Grumman's first quarter 2024 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 Ernst Vice President.
Todd B. Ernst: I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's first quarter 2024 conference call. We'll refer to a presentation that is posted on our IR website this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call.
Todd B. Ernst: Investor Relations Mr. Ernst.
Todd B. Ernst: Please proceed.
Todd B. Ernst: Thanks, Josh and good morning, everyone and welcome to Northrop Grumman's first quarter 2020 for a conference call. We'll refer to a presentation that is posted on our IR website. This morning before we start matters discussed on today's call, including guidance and outlooks for 2024 and beyond reflect the company's judgment based on information information available at the time of this call.
Todd B. Ernst: These forward-looking statements constitute forward-looking statements pursuant to the safe harbor provisions of federal securities laws. Such forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SAC filings. These risks and uncertainties may cause actual company results to differ materially.
Todd B. Ernst: They constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws.
Todd B. Ernst: Forward looking statements involve risks and uncertainties, including those noted in today's press release, and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.
Todd B. Ernst: Today's call will include non-GAAP financial measures that are reconciled to our GAAP results and our earnings. 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. Thank you, Todd. Good morning, everyone.
Todd B. Ernst: Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release and on the call today are Kathy Warden, our chairman CEO and President and Dave Keffer, Our CFO at this time I would like to turn the call over to Kathy Kathy. Thank you Todd Good morning, everyone. It's so good to have you joining us today. So earlier this morning, we released.
Kathy J. Warden: It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And as you can see, we are off to a strong start to the year with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance, has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales, driven by growth in all four of our sectors.
Kathy J. Warden: Our first quarter results and as you can see we are off to a strong start to the year with broad based growth across our portfolio.
Kathy J. Warden: The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance has positioned us for continued success.
Todd B. Ernst: Growing global demand for our capabilities led to an exceptional 9% year over year increase in Q1 sales driven by growth in all four of our sectors.
Kathy J. Warden: The productivity and cost efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong, resulting in segment operating margin dollars increasing by 10%. Operating profit expansion, along with the lower share count, helped to drive 15% EPS growth.
Todd B. Ernst: The productivity and cost efficiency measures, we have been implementing are gaining traction and our program performance in the quarter with strong resulting in segment operating margin dollars increasing by 10%.
Todd B. Ernst: Operating profit expansion, along with the lower share count helped to drive 15% EPS growth.
Kathy J. Warden: Overall, our first quarter performance was in line with or better than our expectations, and we are reaffirming our 2024 company-level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the US fiscal year 2024 defense budget, which includes support for our key programs and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget and future years defense program, or FIDET, and these also were consistent with our expectations.
Todd B. Ernst: Overall, our first quarter performance was in line with or better than our expectations and we are reaffirming our 2024 company level guidance.
Todd B. Ernst: Global demand for our products continues to be robust fueled by rising defense budgets and our market position.
Todd B. Ernst: We're pleased that an agreement was reached on the U S fiscal year 2020 for defense budget, which includes support for Oxy program.
Todd B. Ernst: And represents a 6% growth in investment accounts over 2023.
Todd B. Ernst: In March the administration released the 2025 defense budget and future Years' Defense program or fight it.
Todd B. Ernst: And these also were consistent with our expectations.
Kathy J. Warden: We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons, and space. Together, the appropriations and FIDA give us confidence in our longer-term outlook, even if we experience a somewhat slower top-line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. These span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth.
Todd B. Ernst: We continue to see robust support for our program portfolio.
Todd B. Ernst: In areas that include nuclear modernization microelectronics advanced weapons and space.
Todd B. Ernst: Together, the appropriations inside up give us confidence in our longer term outlook, even if we experience a somewhat slower top line growth environment for the U S defense budget in the short term.
Todd B. Ernst: If we look beyond the domestic market, we continue to see numerous new international opportunities as well.
Todd B. Ernst: Span a wide range of capabilities across our portfolio and they provide an additional avenue for sustainable and profitable growth.
Kathy J. Warden: In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IBCS product line, known as NARA. This represents the short-range air and missile defense portion of Poland's missile defense architecture, and it will augment the medium-range portion, which is currently being deployed.
Todd B. Ernst: In the first quarter, Poland signed a letter of acceptance with the U S government for an additional implementation of our IV <unk> product line known as <unk>.
Todd B. Ernst: This represents the short range air and missile defense portion of Poland.
Todd B. Ernst: Defense architecture, and it will augment the medium range portion, which is currently being deployed.
Kathy J. Warden: In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth-generation aircraft. This includes our iViews electronic warfare offering, which leverages the US program of record. i-Views has been downselected by two international partners, and we are in discussions with seven other countries.
Todd B. Ernst: In addition to Poland, we see an IV see us pipeline now of approximately $10 billion from numerous countries who are considering this joint Battle management system.
Todd B. Ernst: Another important suite of international opportunities for Northrop Grumman is sensor modest.
Todd B. Ernst: Modernization of fourth generation aircraft.
Todd B. Ernst: This includes our I've use electronic warfare, offering, which leverages the U S program of record.
Todd B. Ernst: I've used has been down selected by two international partners.
Todd B. Ernst: And we are in discussions with seven other countries.
Kathy J. Warden: Overall, iViews has the potential to be a new multi-billion dollar product line for us. We're also well positioned to address emerging international opportunities for autonomous systems. The first of four Triton aircraft is expected to be delivered to Australia later this year.
Todd B. Ernst: Overall I view this has the potential to be a new multibillion dollar product line for us.
Todd B. Ernst: We're also well positioned to address emerging international opportunities for autonomous systems.
Todd B. Ernst: The first of four Triton aircraft is expected to be delivered to Australia later this year in.
Kathy J. Warden: In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst allied nations. We believe our Triton program is well suited to meet these requirements, providing opportunities for up to five aircraft, and we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in US and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that, in aggregate, have the potential to support further growth in our defense systems portfolio at solid margins. And this week, the U.S. Congress passed supplemental funding bills that include munitions procurement and missile product capacity expansion.
Todd B. Ernst: In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst Allied nations. We believe our training program is well suited to meet these requirements.
Todd B. Ernst: Providing an opportunity for up to five aircraft.
Todd B. Ernst: And we see additional trading opportunities emerging elsewhere in Europe.
Todd B. Ernst: There also continues to be an uptrend in U S and allied partner demand for missile products and ammunition.
Todd B. Ernst: This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our defense systems portfolio and solid margins.
Todd B. Ernst: And this week the U S Congress passed supplemental funding Bill, which includes munitions procurement and missile product capacity expansion.
Todd B. Ernst: As we've shared in our prior calls to meet growing demands across our weapons systems business, we have been investing in our largest solid rocket motor production facility over the past five years.
Todd B. Ernst: And we have now tripled our production capacity for tactical SRM.
Todd B. Ernst: Technology leadership is an important part of our business strategy and we've been investing to maintain our lead in microelectronics for defense applications.
Kathy J. Warden: As we shared in our prior call, to meet growing demand across our weapons systems business, we have been investing in our largest solid rocket motor production facility over the past five years, and we have now tripled our production capacity for tactical SRM. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization.
Todd B. Ernst: To further this objective we recently established the Northrop Grumman Microelectronics Center.
Todd B. Ernst: Which brings together our microelectronic capability from across the company into one organization.
Todd B. Ernst: It will be led by our mission systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics.
Todd B. Ernst: Today, our U S microelectronic facilities produce over a million micro chips, a year with tailored design fabrication and advanced packaging needed to support the most advanced defense systems and sensors.
Kathy J. Warden: It will be led by our mission systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics. Today, our U.S. microelectronics facilities produce over a million microchips a year with tailored design, fabrication, and advanced packaging needed to support the most advanced defense systems and sensors.
Todd B. Ernst: We also work with leading edge technology developers in the commercial space like Nvidia to incorporate their technology into our National Security solutions.
Todd B. Ernst: In addition to advancement and capability, we are expanding our capacity in this important technology area in.
Todd B. Ernst: In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Waynesboro, Virginia.
Todd B. Ernst: This 200 million dollar investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions.
Kathy J. Warden: We also work with leading-edge technology developers in the commercial space, like NVIDIA, to incorporate their technology into our national security solution. In addition to advancements in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Waynesboro, Virginia.
Todd B. Ernst: As I mentioned earlier, we are laser focused on performance and driving cost efficiencies in our business.
Todd B. Ernst: This includes deploying systems and tools that help enable increased productivity across our businesses.
Todd B. Ernst: In the first quarter, we completed the implementation of a significant financial ERP upgrade which consolidated multiple versions of our prior system and it will significantly improve the efficiency of our operations.
Kathy J. Warden: With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser focused on performance and driving cost efficiencies in our business. This includes deploying systems and tools that help enable increased productivity across our. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operation.
Todd B. Ernst: This new system provides the foundation that supports many of the other digital transformation initiatives and it plays an integral role in our longer term margin.
Todd B. Ernst: Expansion strategy.
Todd B. Ernst: The upgrade as you would understand was a massive undertaking that was.
Todd B. Ernst: Achieved with minimal disruption to our business, it's really a credit to the entire team who worked tirelessly to achieve this outcome.
Todd B. Ernst: We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers.
Todd B. Ernst: We saw benefits of this in the first quarter, particularly in production programs at both as and BS.
Todd B. Ernst: Efficiency in both direct and indirect cost management continues to be a priority across the company.
Kathy J. Warden: This new system provides a foundation that supports many of the other digital transformation initiatives, and it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit for the entire team who worked tirelessly to achieve this outcome.
Todd B. Ernst: Program execution is another area of particular emphasis in 2024.
Todd B. Ernst: In our space sector after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers executing our extensive backlog and generating strong returns in the process.
Todd B. Ernst: This includes the progress we're making on the Sentinel program.
Kathy J. Warden: We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers. We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company.
Todd B. Ernst: We're continuing to execute the AMD phase of the program and we've made solid progress on design and development activities for the facilities and support equipment as well as the missile itself.
Todd B. Ernst: The non Mccurdy review is continuing and we are providing support to the department of defense in that process as well.
Todd B. Ernst: It's a complex undertaking to modernize the U S strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that detour them.
Kathy J. Warden: Program execution is another area of particular emphasis in 2024. In our space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog, and generating strong returns in the process. This includes the progress we're making on the Sentinel Program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment, as well as the missile itself. The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well.
Todd B. Ernst: We're honored to be part of this vital mission. So we're partnering with our customers and bringing the focus resources and talent needed to deliver on those commitments.
Todd B. Ernst: Finally, I'd like to provide an update on our capital deployment strategy.
Todd B. Ernst: First and foremost we are investing in capabilities that meet our customers' needs to address rapidly evolving threats.
Todd B. Ernst: This year, we continue to expect that we will invest roughly $1 $8 billion in capital expenditures, bringing our total investment to nearly 8 billion since the beginning of 2020.
Todd B. Ernst: These investments have contributed to our strong growth performance and outlook.
Todd B. Ernst: At the same time, we are efficiently returning capital to shareholders, including nearly $1 5 billion in the first quarter.
Todd B. Ernst: So in summary.
Todd B. Ernst: With a broad portfolio of well supported programs continued new domestic and international opportunities.
Todd B. Ernst: Our relentless focus on performance and our capital deployment strategy designed to create value for customers and shareholders alike.
Kathy J. Warden: It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent. We're honored to be part of this vital mission. So we're partnering with our customers and bringing the focus, resources, and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats.
Todd B. Ernst: Northrop Grumman is well positioned for the future.
Todd B. Ernst: So with that I'd like to hand, the call over to Dave and he's going to cover some of the details of our financial performance and outlook before we take your questions Steve.
David Keffer: Thanks, and good morning, everyone.
David Keffer: As Kathy highlighted we're off to a strong start to the year sales operating income and EPS all increased meaningfully from the first quarter of 2023, as we execute on our backlog and drive efficiencies in our business.
David Keffer: With our topline results on slide four in our earnings deck first quarter sales increased 9% to $10 1 billion.
David Keffer: We were pleased to deliver higher Q1 sales at all four of our segments.
David Keffer: These results were ahead of our initial projections for the first quarter due in part to the timing of material volume on certain programs with that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years.
Kathy J. Warden: This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures, bringing our total investment to nearly $8 billion since the beginning of 2020. These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly one and a half billion in the first quarter.
David Keffer: I'll address the factors contributing to this as I walk through updates to our segment guidance.
David Keffer: Sales were particularly strong up 18% driven by higher volume on the B 21 program as well as on mature production programs like F 35.
David Keffer: Defense systems sales increased 3%, primarily due to growth growth on multiple programs in our weapons business and as expected were partially offset by lower volume on an international training program.
Kathy J. Warden: So, in summary, with a broad portfolio of well-supported programs, continued new domestic and international opportunities, a relentless focus on performance, and a capital deployment strategy designed to create value for customers and shareholders alike, Northrop Grumman is well positioned for the future. So with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your question. Dave
David Keffer: Mission systems sales grew by 4% led by rapid growth on advanced microelectronics programs and our restricted portfolio, partially offset by lower volume on sabre.
David Keffer: And sales that space increased by 9% with broad based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp.
David Keffer: Turning to the bottom line, we remain laser focused on performance in Q1, we generated segment operating income of $1 1 billion.
David Keffer: Year over year increase of 10%.
David Keffer: Thanks, and good morning, everyone. As Kathy highlighted, we're off to a strong start this year. Sales, operating income, and EPS all increased meaningfully from the first quarter of 2023, as we execute on our backlog and drive efficiencies in our business. Starting with our top line results on slide 4 in our earnings deck, first quarter sales increased 9% to $10.1 billion. We were pleased to deliver Hire Q1 sales in all four of our segments.
David Keffer: Margin rate was also solid at 10, 9%.
David Keffer: As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mixed shifts favorably macro conditions improve and productivity measures continued to bear fruit.
David Keffer: Aeronautics operating income increased 25% for an operating margin rate of 10%.
David Keffer: Efficient indirect rate performance driven by productivity initiatives and careful cost management helped to generate a healthy volume a favorable net EAC adjustments.
David Keffer: These adjustments were recognized across the <unk> portfolio, but primarily benefited mature production programs on B 21, there were no significant changes to our EAC and we continue to make good progress in the test phase of the AMD program and on the build of the <unk> production units inflow.
David Keffer: These results were ahead of our initial projections for the first quarter, due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance. As for AS sales, they were particularly strong, up 18% driven by higher volume on the B21 program, as well as on mature production programs like F35. Defense system sales increased 3%, primarily due to growth on multiple programs in our weapons business and, as expected, were partially offset by lower volume on an international training program.
David Keffer: We have finalized negotiations with additional suppliers on the <unk> phase of the program and are in the late stages of negotiations with the remaining.
David Keffer: Defense systems operating income grew 11%.
David Keffer: Also benefited from favorable mix and indirect rate performance driving their AUM rate to 12, 5%.
David Keffer: At mission systems.
David Keffer: Segment operating income increased 5% in.
David Keffer: And margin rate increased 20 basis points to 14, 2%.
David Keffer: EMS is O&M rate benefited from favorable mix on higher margin advanced microelectronics programs.
David Keffer: Mission Systems sales grew by 4%, led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABRE, and Sales at Space increased by 9% with broad-based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp. Turning to the bottom line, we remain laser focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%.
David Keffer: Partially offset by lower net favorable EAC adjustments.
David Keffer: We see opportunities to further improve performance at MFS drew.
David Keffer: Driven by operational efficiencies and the investments we've made in our factories.
David Keffer: Lastly space operating income increased 6%.
David Keffer: And its margin rate was a solid nine 1%.
David Keffer: Moving to earnings per share on slide six diluted EPS was $6 32 in Q1, an increase of 15% from the prior year.
David Keffer: The increase was driven by our strong growth in segment performance as well as from higher net pension income and a lower share count.
David Keffer: Turning to cash flow, we're pleased with our cash performance, particularly in light of our ERP conversion that went live in the first quarter.
David Keffer: Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mix shifts favorably, macro conditions improve, and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%.
David Keffer: This was a significant undertaking that will help to drive additional efficiencies in our business over time.
David Keffer: Q1 free cash flow was an outflow of approximately $1 billion and we expect a strong quarter of cash generation in Q2.
David Keffer: This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year.
David Keffer: Moving to guidance, we are reaffirming our 2024 company level guidance and have a few updates at the segment level.
Unknown Attendee: Unknown Attendee, Scott Deuschle, Northrop Grumman, These adjustments were recognized across the AS portfolio but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow. We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining.
David Keffer: We continue to project a book to Bill ratio close to one times for the year.
Speaker Change: No we expect a higher ratio.
Speaker Change: DFS and MFS and a lower ratio of space given all the backlog growth that is generated in recent years and flattening U S space budgets.
Speaker Change: At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results with modest expansion in the second half.
Speaker Change: We expect the quarterly profile to very at the segment level. So I'll take a moment to provide some additional color.
Speaker Change: First <unk>.
Speaker Change: S and MFS sales and margin dollars are expected to ramp throughout the year generally consistent with prior year patterns.
David Keffer: Defense Systems operating income grew 11%. They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. Admission Systems.
Speaker Change: Restricted programs and MFS continued to expand.
Speaker Change: And the DS weapons business has significant demand cathie described which should lead to further second half growth.
Speaker Change: Our margin rate guidance.
Speaker Change: <unk> was adjusted slightly higher Sds and slightly lower at MFS.
Speaker Change: Collecting our Q1 performance and latest expectations for the remainder of the year.
David Keffer: Segment operating income increased 5%, and the Margin Rate increased 20 basis points to 14.2%. MS's OM rate benefited from favorable mix on higher-margin advanced microelectronics programs, although partially upset by lower net favorable EAC adjustment.
Speaker Change: At Aeronautics, we are increasing our sales guidance to the mid 11 billion to reflect our strong Q1 results and our latest projections for B 21 sales timing.
Speaker Change: But the quarterly sales profile is projected to be different this year than it was in 2023.
Speaker Change: The timing of materials volume, primarily on F 35, and <unk> 21.
Speaker Change: Drove additional Q1 sales so we would expect a flatter profile through the remaining quarters.
David Keffer: We see opportunities to further improve performance at MS, driven by operational efficiencies and investments we've made in our factories. Lastly, space operating income increased 6%, and its margin rate was a solid 9.1%. Moving to earnings per share on slide six, Diluted EPS was $6.32 in Q1, an increase of 15% from the prior year.
Speaker Change: As our full year guidance indicates as margin rates are expected to be lower in subsequent quarters.
Speaker Change: Based on business mix and the strength of Q1 EAC adjustments.
Speaker Change: For the full year, we continue to expect margins in the mid 9% range.
Speaker Change: In that space, we're lowering our sales guidance to the low to mid 14, billions, which roughly reflects 3% annual growth.
Speaker Change: Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the <unk> decision and the contract termination in restricted space that we noted last quarter.
David Keffer: The increase was driven by our strong growth and segment performance, as well as higher net pension income and a lower share count. Turning to cash flow, we're pleased with our cash performance, particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 pre-cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2.
Speaker Change: This is expected to be partially offset by continued growth in sentinel in the SBA portfolio.
Speaker Change: Below the segment line, we are reaffirming our company level guidance, reflecting the strength of our broad portfolio.
Speaker Change: We continue to expect corporate unallocated costs to be weighted towards the second half of the year consistent with prior years.
Speaker Change: <unk> expense will also be higher in future quarters.
Speaker Change: Due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%.
Speaker Change: As we've noted before.
Speaker Change: We're monitoring any changes in tax legislation and any updates on our tax appeals processes that by their nature are not factored into our guidance.
David Keffer: This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year. Moving to guidance, we are reaffirming our 2024 company-level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to one times for the year.
Speaker Change: And as a reminder, we completed a $2 5 billion debt offering at attractive rates. Shortly after the filing of our 10-K. The proceeds will be used in part to retire $1 5 billion of notes that are maturing in January 2025.
Speaker Change: As well as for general corporate purposes, including share repurchases.
Speaker Change: We initiated a $1 billion accelerated share repurchase in Q1, which is now nearly complete.
David Keffer: Note: we expect a higher ratio at AS, DS, and MS and a lower ratio at space, given all the backlog growth that has been generated in recent years and the flattening US space budget. At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results, with modest expansion in the second half. We expect the quarterly profiles to vary at the segment level, so I'll take a moment to provide some additional color.
Speaker Change: In total, including our open market purchases are Q1 repurchases were $1 2 billion.
Speaker Change: For the full year, we have increased our expectations for share repurchases to greater than $2 billion.
Speaker Change: We also remain committed to providing a strong and growing dividend.
Speaker Change: Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows and our diverse and durable portfolio. We continue to project industry, leading investments in our business to support our customers, while returning excess cash to shareholders.
David Keffer: First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns. Restricted programs in MS continue to expand, and the DS weapons business has the significant demand that Kathy described, which should lead to further second half growth. Margin Rate Guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year.
Speaker Change: We're confident that this business strategy will create value for all our stakeholders.
Speaker Change: Summary, we're off to a great start to the year and we remain upbeat about our long term outlook.
Speaker Change: With that let's open the call for questions.
Speaker Change: Thank you.
Speaker Change: 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. Please limit yourself to one question and one follow up you may reenter the queue for additional questions.
David Keffer: At Aeronautics, we are increasing our sales guidance to the mid $11 billion to reflect our strong Q1 results and our latest projections for B21 sales timing. The quarterly sales profile is projected to be different this year than it was in 2023.
Speaker Change: One moment.
Speaker Change: Hi.
Speaker Change: Our first question comes from Ron Epstein with Bank of America, You May proceed.
Ronald Jay Epstein: Hey, good morning, everyone.
Ronald Jay Epstein: Cathy if you could speak to just maybe a little more detail than that 95 billion supplemental.
Ronald Jay Epstein: Oh, what potentially is in there for north given everything you guys have been doing.
Ronald Jay Epstein: And those related businesses.
David Keffer: The timing of materials volume, primarily on F-35 and B-21, drove additional Q1 sales, so we'd expect a flatter profile through the remaining quarters. As our full year guidance indicates, AS margin rates are expected to be lower in subsequent quarters. Based on business mix and the strength of Q1 EAC Adjustments. For the full year, we continue to expect margins in the mid 9% range, and at Space, we're lowering our sales guidance to the low to mid $14 billion, which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the NGI decision and the contract termination in restricted space that we noted last quarter.
Ronald Jay Epstein: Yes, well as I noted we are pleased that the supplemental did pass this week and we are looking through it there are a number of areas that align to our program portfolio.
Ronald Jay Epstein: Where we are prime and weapons programs, others, where we are a supplier of solid rocket Motors and then there is a line for additional capacity expansion I talked about the capacity expansion that we have done four solid rocket motors and our largest production facility that over the last several.
Ronald Jay Epstein: Years to enable us to triple capacity. There is additional funding that would take that capacity, even higher and reflects what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity.
David Keffer: This is expected to be partially offset by continued growth in Sentinel in the SDA portfolio. Below the segment line, we are reaffirming our company-level guidance, reflecting the strength of our broad portfolio. We continue to expect corporate unallocated costs to be weighted toward the second half of the year, consistent with prior years. Interest expense will also be higher in future quarters. Due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%.
Ronald Jay Epstein: We can wait in the coming months and years.
Speaker Change: And then maybe just a quick follow on if I may.
Speaker Change: With the push out of FX X.
Speaker Change: How's that.
Speaker Change: Strategic impact itself.
Speaker Change: On the Aeronautics business.
Speaker Change: There are a number of opportunities in aeronautics that we are pursuing that being one of them. It doesn't really have an impact on our near term outlook for that business.
Speaker Change: We shared today, we're raising the sales guidance for that business. This year and that's really on the strength of the current portfolio and the growth that we continue to see there, but we will continue to pursue additive opportunities.
David Keffer: As we've noted before, we're monitoring any changes in tax legislation and any updates in our tax appeals processes that, by their nature, are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing of our 10K. Proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025, as well as for general corporate purposes, including share repurchase. We initiated a $1 billion accelerated share repurchase program in Q1, which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion.
Speaker Change: The Navy program being one of them.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Doug Harned with Bernstein you May proceed.
Douglas Stuart Harned: Hi, good morning, Thank you.
Douglas Stuart Harned:
Douglas Stuart Harned: On.
Douglas Stuart Harned: You talked a little bit about about outlook for book to Bill This year and backlog was down in each segment in Q1.
Douglas Stuart Harned: Understand some of the space issues, but on an <unk> if youre looking at a book to bill of above one for the year.
Douglas Stuart Harned: Can you talk about.
Douglas Stuart Harned: Where that's likely to come from.
Douglas Stuart Harned: What will drive those business units since that the backlog was down in Q1.
David Keffer: For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend. Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows from our diverse and durable portfolio. We continue to make industry-leading investments in our business to support our customers while returning excess cash to shareholders. I'm confident that this business strategy will create value for all our stakeholders.
Speaker Change: Yes, Doug as we've talked about before.
Douglas Stuart Harned: Words can be very lumpy and so we tend to look at our book to bill over a longer stretch of time and our last two years have been well over one so we expected the first quarter to be lighter than we had signaled that as we look at the full year, we still believe that we'll be near one and it's largely going to be driven by our short.
Douglas Stuart Harned: Their cycle businesses, So think mission systems, and defense systems and space will clearly the lowest as we digest the Mci loss and of course, the cancellation that we had in the first quarter, but I'll remind you our space business has nearly doubled over the last four years and the book to Bill there has been incredibly.
David Keffer: In summary, we're off to a great start to the year, and we remain upbeat about our long-term outlook. And with that, let's open the call for questions. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one one on your touch-tone telephone. Again, press star one one to ask a question.
Douglas Stuart Harned: Strong so theres still carrying a large backlog of business that supports the growth rates that we're projecting for them.
Douglas Stuart Harned: And then just on space.
Douglas Stuart Harned: <unk>.
Douglas Stuart Harned: The importance of Sentinel and.
Douglas Stuart Harned: And you've talked over the last quarter about.
Operator: Please limit yourself to one question and one follow-up. You may re-enter the queue for additional questions.
Douglas Stuart Harned: Some of the non maturity breach and those issues but.
Douglas Stuart Harned: When you look at the at the Air Force moving moving the IOC schedule back by two years, how does that affect your growth path on Sentinel.
Ronald Jay Epstein: Our first question comes from Ron Epstein with Bank of America. You may proceed. Hey, good morning, everyone. Kathy, if you could speak to just maybe a little more detail about that $95 billion supplemental. What potential is there for Northrop, given everything you guys have been doing in those related businesses? Yes, well, as I noted, we are pleased that the supplemental did pass this week. And as we are looking through it, there are a number of areas that align to our program portfolio, some where we are prime and weapons programs, others where we are a supplier of solid rocket motors. And then there is a line for additional capacity expansion.
Douglas Stuart Harned: We had talked about certain all growth coming.
Douglas Stuart Harned: Flattening out for a few years and then returning to growth as we moved into the production phase later in the decade that still holds true that timing has of course moved as the program schedule is moving but the profile still is quite similar to what we have been discussing and it was so far out.
Douglas Stuart Harned: In the future it really wasn't in any of the projections that we had in 24 or even 25, it was well beyond that.
Douglas Stuart Harned: Still a healthy ramp as expected for that program and we are laser focused on delivering and meeting the schedule commitments that we are working toward with the air Force.
Speaker Change: Okay very good thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Cristina <unk> with Morgan Stanley You May proceed.
Kathy J. Warden: I talked about the capacity expansion that we have done for solid rocket motors in our largest production facility that, over the last several years, has enabled us to triple capacity. There is additional funding that would take that capacity even higher and reflect what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity that we can add over these coming months and years.
Cristina: Hey, good morning, Kathy or Dave.
Cristina: Good morning.
Cristina: The Air Force lowered its near term requested funding levels for 'twenty, one and the fiscal year 'twenty five budget proposal and they talked about lower negotiated prices on low rate production. How does this change alter the economics of the program.
Cristina: And risks of incremental charges.
Speaker Change: It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates and as we move towards the contract.
Kathy J. Warden: And then maybe just a quick follow-on, if I may, with the push out of FAXX. What, how's that, what strategic impact does that have on aeronautics? There are a number of opportunities in aeronautics that we are pursuing, that being one of them. It doesn't really have an impact on our near-term outlook for that business.
Cristina: We're over with exercise the first option. The government is now reconciling to our contract value. There was no change in price schedule quantity. It's just a reflection of moving off of an independent cost estimate and moving to our contract value which of course was <unk>.
Ronald Jay Epstein: As we shared today, we're raising the sales guidance for that business this year, and that's really on the strength of the current portfolio and the growth that we continue to see there. But we will continue to pursue additive opportunities, the Navy program being one of them. Great. Thank you very much.
Cristina: Then theyre independent cost estimate.
Speaker Change: Great. Thank you for the color.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Sheila <unk> with Jefferies. You May proceed.
Sheila: Good morning, everyone. Thank you so much.
Sheila: Kathy I wanted to ask about.
Sheila: Maybe can you talk about the puts and takes there just given supply chain as well as services and incremental opportunities such as <unk> and missile systems. How do you think about the trajectory just given some of the positive momentum seen in nickel.
Operator: Thank you. One moment for questions. Our next question comes from Doug Arnett with Bernstein. You may proceed. Good morning.
Kathy J. Warden: All of the missile defense and obviously supplemental.
Kathy J. Warden: And the driver of potential margin improvement there.
Doug Arnett: Thank you. Owen, you know, you talked a little bit about Outlook for Book to Bill this year and how the backlog was down in each segment in Q1. I understand some of the space issues, but on ASDS and MS, if you're looking at a book to bill of above one for the year, can you talk about where that's likely to come from? What will drive those business units since the backlog was down in Q1?
Sheila: Yes, so our defense systems portfolio has been undergoing a transformation over the past several years. So as you know we divested the services business and we still have a sustainment and modernization business.
Sheila: Business has been flattish and this year, we talked about the headwinds in that business to growth associated with an international training program, you will see that weighing a bit on first quarter growth in <unk> in 3% overtime, we expect that growth rate to reflect the other two portions of.
Doug Arnett: Yes, Doug, as we've talked about before, awards can be very lumpy. And so we tend to look at our book to bill over a longer stretch of time. And our last two years have been well over one.
Sheila: The business more and more as that mix shifts toward weapons and our battle management portfolio, that's where IPC upset I spoke to on todays call about some of those opportunities.
David Keffer: So we expected this first quarter to be lighter. We had signaled that as we look at the full year, we still believe that we'll be near one. And it's largely going to be driven by our shorter cycle businesses. So think mission systems and defense systems.
Sheila: Both domestically and internationally in the weapons and CIBC us portfolio and so we expect those to contribute to growth and they are also higher margin than our sustainment business, so as that mix shifts so well margins improve.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Doug Arnett: And space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last four years, and the book to builder has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them. And then, just on space, you mentioned the importance of Sentinel.
Speaker Change: Our next question comes from Seth Sigman with Jpmorgan you May proceed.
Seth Michael Seifman: Okay. Thanks, very much and good morning, good morning.
Seth Michael Seifman: Kathy I wanted to ask on.
Speaker Change: Autonomous.
Speaker Change: Aircraft and.
Seth Michael Seifman: CCA program, we saw last night the news about Andrew selection, along with General Atomics and I was wondering if you can with that news maybe update us on Northrop strategy to capture new work in the autonomous space.
David Keffer: And, you know, and we talked over the last quarter about some of the issues, the non-McCurdy breach and those issues. But when you look at the Air Force moving, moving the IOC schedule back by two years, how does that affect your growth path? We had talked about Sentinel growth coming, flattening out for a few years, and then returning to growth as we moved into the production phase later in the decade. That still holds true today.
Kathy J. Warden: Yeah. So we're obviously disappointed.
Kathy J. Warden: Disappointed to learn that we werent selected on the face of the CCA program. Thank you.
Seth Michael Seifman: Therefore since described this acquisition strategy is a continuous competition and theyre already outlining future phases. So we'll see what that presents in terms of future entry point. We also see the other services in the U S and I talked about international partners as well continuing to look to add to their autonomous vehicle fleets.
Seth Michael Seifman: And so we are pursuing those opportunities we haven't learned anything at this point that fundamentally changes our strategy and autonomy, but we'll monitor how the CCA program progresses, and well incorporate any learnings that we have into those future opportunities and for US you didn't ask but this phase of the program with <unk>.
Doug Arnett: That timing has, of course, moved as the program schedule is moving, but the profile still is quite similar to what we have been discussing. And it was so far out in the future that it really wasn't in any of the projections that we had for 24 or even 25. It was well beyond that.
Seth Michael Seifman: <unk> small we didn't have it assumed in our plan. So there's no impact to the guidance that we shared this morning for the ILS sector.
David Keffer: Still, a healthy ramp-up is expected for that program, and we are laser-focused on delivering and meeting the schedule commitments that we are working toward with the Air Force. Okay, very good. Thank you.
Speaker Change: Okay, Okay, Great and then maybe a follow up on it when you think about where you want to be focused.
Speaker Change: And autonomy I guess the legacy of the company is more on the exquisite side.
Operator: One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Hey, good morning, Kathy and Dave. Good morning.
Speaker Change: <unk>.
Speaker Change: There will probably be some demand for that but also.
Speaker Change: Demand for quantity, and which which requires affordability.
Kristine Tan Liwag: You know, the Air Force lowered its near-term requested funding levels for B-21 in the Fiscal Year 25 budget proposal, and they talked about lower negotiated prices on low-rate production. How does this change alter the economics of the program and risks of incremental charges? It doesn't change the economics of the program. What happened is the budget was set based on independent cost estimates, and as we move towards the contract phase where Elric was exercised the first option, the government is now reconciling to our contract value. There was no change in price, schedule, or quantities.
Speaker Change: Do you plan to pursue opportunities in both of those.
Speaker Change: Some markets were really focused more on that kind of legacy exquisite piece of the market.
Speaker Change: We are obviously working toward affordability in our product line. So we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings and I think we had quite a compelling offering on CCA and can compete in that market.
Speaker Change: Place, we are really positioned to provide the best solutions that our customer needs against the high end threat. However, we are not looking to compete in a more commoditized part of the market, it's very low cost and not survivable system. That's just not our business model and we know that.
Kathy J. Warden: It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their independent cost estimate. Great. Thank you for the caller.
Speaker Change: So we will remain disciplined in where we invest and the pieces of the market that we pursue but we think that what we provide is still highly relevant.
Speaker Change: Great. Thank you very much.
Kristine Tan Liwag: Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu on Jeffrey's behalf. You may proceed. Good morning, everyone. Thank you so much.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from David <unk> with Barclays. You May proceed.
David Keffer: Thanks, Good morning.
David Keffer: Good morning.
David Keffer: Kathy I wanted to ask about EMS margins.
Sheila Karin Kahyaoglu: Kathy, I wanted to ask about DS. Maybe you can talk about the puts and takes in the just given supply chain, as well as services and incremental opportunities such as IBCS and missile systems? How do you think about the trajectory just given some of the positive movements we've seen in missiles and missile defense and, obviously, supplementals, and the driver of potential margin improvement there? Yes, so our defense systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has been stagnant.
David Keffer: A couple of years ago, we were running in the 15 level. They stepped down a little bit last year, you took down the margin guide there could you just.
David Keffer: Kind of talk about what what's driving the lower margins is it just is it just solely mix.
David Keffer: What's driving the lower margin.
David Keffer: It's a bit of mix as we've been talking about they have a higher cost plus mix now than they have.
David Keffer: Historically, and we expect that to shift over time, but they are still at a high watermark.
David Keffer: And there also is a productivity element to the story, we've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business you see a mid single digit level growth in mission systems, but with price coming down on microelectronics, it's actually a much higher.
Kathy J. Warden: And this year, we talked about a headwind in that business due to growth associated with an international training program. You see that weighing a bit on first quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other two portions of the business more and more as that makes a shift toward weapons and our battle management portfolio. That's where IVCS fits.
David Keffer: Volume ramp than is reflected in the total sales growth of the business. So as we have clients that ramp productivity has taken a bit of a dip, but as we said we're focused on getting back to our prior performance levels at now this higher volume level and we see that.
David Keffer: It's something that the team is very capable of doing and that's why you see a margin profile.
David Keffer: Always is a start a little slower and ramp through the year for MFS, but youll see it again reflected this year based on the productivity improvements that we expect to achieve throughout the year.
Kathy J. Warden: I spoke on today's call about some of those opportunities, both domestically and internationally, in the weapons and the IVCS portfolios. And so we expect those to contribute to growth. And they are also higher-margin than our sustainment business. So as that shifts, so will margins improve. Thank you. One moment per question.
Speaker Change: Okay got it and then.
Speaker Change: Similar question over on the space side. So you took down the top line.
Speaker Change: And there I assume that was partially in Gi.
Speaker Change: The slower growth should we see that potentially reflect itself in a little bit better margin profile I know you kept the margin guidance.
Operator: Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Hey, thanks very much and good morning.
Speaker Change: Changed ignite but.
Speaker Change: I guess, the MTI loss in just a little bit slower growth could that actually help the hope enhance the margin side of things.
Seth Michael Seifman: I wanted to ask about autonomous aircraft and, you know, the CCA program. We saw the news last night about android selection along with General Atomics, and I was wondering, you know, if you could, with that news, maybe, you know, update us on Northrop's strategy to capture new work in the autonomous space. Yeah, so we're obviously disappointed to learn that we weren't selected for this phase of the CCA program. The US Air Force has described this acquisition strategy as a continuous competition, and they're already outlining future phases.
Speaker Change: Yes.
Speaker Change: We look at the slower growth it is largely development programs.
Speaker Change: Are dilutive to the both faced margin rate than the company margin rate. So.
Speaker Change: That part of the business is no longer as significant you'll see that be.
Speaker Change: Both margin and cash tailwind because there was also capex investments planned that we will not expand in those programs.
Speaker Change: Now either.
Speaker Change: Thanks very much.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Cai von rumor with TD Cowen You May proceed.
Seth Michael Seifman: So we'll see what that presents in terms of future entry points. We also see other services in the US, and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy for autonomy, but we'll monitor how the CCA program progresses and incorporate any learnings that we have into those future opportunities.
Speaker Change: Yes. Thank you so much and good performance Kathy so.
Speaker Change: Following up on Dave's focus on space I think I've got two questions first the restricted program that was canceled.
Speaker Change: Is there any chance we heard a rumor it might've been related to a supplier issue.
Speaker Change: Is there any chance that that function or that program Mike.
Seth Michael Seifman: Pierre again in the future and secondly.
Seth Michael Seifman: And for us, you didn't ask, but this phase of the program was relatively small; we didn't have it assumed in our plan. So there's no impact on the guidance that we shared this morning for the AF sector. Okay, okay, great.
Seth Michael Seifman: If the FDA.
Speaker Change: Our business.
Speaker Change: You basically decided not to bid.
Speaker Change: On contract is that.
Speaker Change: As a group are those profitable contracts because every time I look there is another new small supplier coming in and they are all fixed price car.
Kathy J. Warden: And then maybe a follow-up on that, you know, when you think about where you want to be focused in autonomy, I guess the legacy of the company is more on the exquisite side, you know, and there will probably be some demand for that, but also, you know, demand for quantity, which requires affordability. Do you plan to pursue opportunities in both of those sub-markets, or really focus more on that kind of exquisite piece of the market? You know, we are obviously working toward affordability in our product line. So we do not want to be viewed as only offering exquisite and expensive technology.
Speaker Change: Contract.
Speaker Change: So let me start with your first question on the restricted program. There is very little I can say given the nature of that program, except to say that.
Speaker Change: The Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist and so we will see how that plays out over time.
Kathy J. Warden: So as we look at the broader space portfolio will answer your SDA question more generally.
Speaker Change: A whole variety of opportunities that we can pursue so we're simply selective on which ones. We're best positioned to win where we think that we can price competitively.
Seth Michael Seifman: So we've been working to drive down the cost of our offerings, and I think we have quite a compelling offering on CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customers need against high-end threats. However, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems. That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant. Great, thank you very much.
Speaker Change: And with SBA, we've been quite successful and those programs are profitable.
Speaker Change: But that's because we're remaining disciplined in choosing where we can best compete win with a reasonable fee.
Seth Michael Seifman: The probability of success.
Seth Michael Seifman: But you did know bid that one program as we move forward is the pricing here getting a little bit more competitive as more people joined the party.
Seth Michael Seifman: The way I think about bid strategy is if there is an area where you have a differentiated value. Then you are going to be able to price. Accordingly, if you dealt you Walt.
Kathy J. Warden: Thank you. One moment for questions. Our next question comes from David Strauss with Barclays. You may proceed. Thanks. Good morning.
Speaker Change: And so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to bid.
David Egon Strauss: Kathy, one question about MS margins. You know, a couple of years ago, we were running in the 15 level; they stepped down a little bit. Last year, you took down the margin guy there.
Speaker Change: Both win and execute it's really a decision we make on every capture is fundamental to the way we bill.
Kathy J. Warden: Can you just kind of talk about what's driving the lower margins? Is it just, is it just solely mix that's driving the lower margin of the MS? It's a bit of a mix, as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they're still at a high watermark. And there is also a productivity element to the story.
Speaker Change: Commit and execute as well as.
Speaker Change: Deliver the returns that we effect so no change there and no difference in space than it is in other parts of our portfolio.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Kathy J. Warden: Our next question comes from Robert Stallard with vertical research you May proceed.
Kathy J. Warden: Robert Your line is now open.
Robert Alan Stallard: Sorry, I was on mute. Thanks, so much good morning.
Earnings.
Speaker Change: Kathy I just wanted to follow up on your comments at the start of the call you talked about the FY 'twenty five request and Spa.
Kathy J. Warden: We've talked about supply chain disruption as we have ramped up, and we are also increasing the scale of that business. You see a mid-single digit level growth in mission systems, but with prices coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business. So as we have climbed that ramp, productivity has taken a bit of a dip, but as we said, we're focused on getting back to our prior performance levels at this higher volume level, and we see that as something this team is very capable of doing.
Kathy J. Warden: Spending leveling off I was wondering do you think could be the bill payers in that budget scenario, whether there's any vulnerability in the Northrop Grumman portfolio. Thank you.
Kathy J. Warden: We looked at the FY 'twenty five.
Kathy J. Warden: <unk> budget is very much in line with our expectations. So no surprises and no concerns about our portfolio. Obviously, we talked about two things where budget was the factor in da choosing to down select early on Mci was largely due to budgetary constraints and then of course the restricted space program.
Kathy J. Warden: But those we have now digested and of course reflected not only in our outlook, but my comments about the FY 'twenty budget. So nothing else that we see in there that is concerning and as I noted 24 ended up being a strong year for the investment account was six <unk>.
Kathy J. Warden: And that's why you see a margin profile that always starts a little slower and ramps through the year for MS, but you'll see it again reflected this year based on those productivity improvements that we expect to achieve throughout the year. Unknown Attendee: Okay, got it.
David Egon Strauss: And then. Similar question over on the space side, so you took down the top line. Unknown Speaker There. I assume that was partially NGI. You know, the slower growth, should we see that potentially reflect itself in a little bit better margin profile? I know you cut the margin. Unchanged at nine.
Kathy J. Warden: Rent growth over 'twenty, three and we also have the supplemental on top of that so it's early in looking at 25%, whereas the budget environment will actually ended up in the U S.
Speaker Change: Also just keep pointing back to international demand is the strongest I've seen in a long time and so we look at global demand not just the U S marketplace.
Kathy J. Warden: But, you know, I guess the NGI loss and just a little bit slower growth could actually help enhance the margin size? Yes, as we look at the slower growth, it is largely development programs that are dilutive to both the base margin rate and the company margin rate. So as that part of the business is no longer as significant, you will see that be both a margin and cash tailwind because there were also CapEx investment plans that we will not expend in those programs now either. Thanks very much.
Speaker Change: I've got a quick follow on on that actually because you did mentioned exports as well and I was wondering if you could give us an update on that what sort of scale as a percentage of revenues.
Speaker Change: Sorry at the moment.
Kathy J. Warden: Grow to in the future there.
Kathy J. Warden: There are about 14% right now and while we don't see that moving significantly in the near term because there was opportunities I noted in the pipeline do take a while to prosecute and turn into sales.
Kathy J. Warden: Do you expect that that will be a faster segments of growth than our domestic business over the next several years just the richness of the pipeline.
Speaker Change: Alright, Thank you very much.
David Egon Strauss: Yeah. Thank you. Just one moment for questions. Our next question comes from Cai Von Rumohr with T.D. Cowan.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Peter <unk> with Alembic Global you May proceed.
Cai von Rumohr: You may proceed. Yes, thank you so much, and good performance, Kathy. Following up on Dave's focus on space, I think I've got two questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue? Is there any chance that that function or that program might reappear again in the future?
Speaker Change: Hey, good morning. Thanks.
Cai von Rumohr: Kathy can you talk about northrop's ruling shipbuilding supply chain.
Cai von Rumohr: I guess is the marine unit and MFS, just because the Navy has talked about some of the supply chain challenges in shipbuilding.
Cai von Rumohr: Maybe you could just kind of a schwab has any concerns maybe in terms of how.
Cai von Rumohr: That unit is performing and the growth outlook, there and just kind of how you guys are managing that unit to just.
Cai von Rumohr: So we have a good feel that.
Cai von Rumohr: Smoke doesn't turn into fire kind of scenarios.
Kathy J. Warden: And secondly, you know, at the SDA business, you basically decided not to bid on one contract. Are those, as a group, profitable contracts? Because every time I look, there's another new small supplier coming in, and they're all fixed prices. That's our contract. So let me start with your first question on the restricted program. There's very little I can say given the nature of that program, except to say that the Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely still exists.
Kathy: Absolutely. It's a critically important part of our portfolio, we're very focused on delivering for our customers in that portfolio and there has been challenges that we own we have been working on a development program for nearly 10 years, its going to deliver an amazing step function improvements in propel.
Kathy J. Warden: <unk> for the Columbia class submarines, and we are near delivering those first pair of turbine generators and that's what the secretary of the Navy was referring to in his testimony on the Hill we are.
Kathy J. Warden: Working to address supply chain challenges as you have heard across the entire shipbuilding enterprise our experience is very consistent.
Cai von Rumohr: And so we will see how that plays out over time. I also, as we look at the broader space portfolio, will answer your SDA question more generally. We see a whole variety of opportunities that we can pursue. So we're simply selective on which ones we're best positioned to win, where we think that we can price competitively.
Kathy J. Warden: With that these programs are long cycle and so we only go through these development efforts once over a multi decade period and there's learning that happens, but in this case I think we're largely through that learning and on a path for delivery.
Cai von Rumohr: We're optimistic of the future ahead, and being able to deliver this capability from a financial perspective that you asked about is relatively small so not something that you should think of as having a material financial impact, but that doesn't mean, we don't take it very seriously.
Kathy J. Warden: And with SDA, we've been quite successful, and those programs are profitable. But that's because we're remaining disciplined and choosing where we can best compete and win with a reasonable fee and probability of success. But you did not bid on that one program, you know, as we move forward, is the pricing here getting a little bit more competitive as more people join the party? You know, the way I think about bid strategies is, if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't.
Speaker Change: Okay, Great I appreciate the color.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Kathy J. Warden: Our next question comes from Scott <unk> with Deutsche Bank You May proceed.
Speaker Change: Hey, good morning, Dave just to clarify what's the message on space growth beyond this year does it reaccelerate off this 4% or so this year.
Kathy J. Warden: I appreciate the question as you know we will provide more specific guidance for all of our businesses and at the enterprise level later this year.
Kathy J. Warden: And provide some indications on the October call as is our.
Kathy J. Warden: Our traditional approach.
Kathy J. Warden: I think the broader themes that we've talked about in space today are important.
Kathy J. Warden: You touched on the restricted program cancellation in the NCI down select.
Cai von Rumohr: And so we don't bid when we don't feel like we have a differentiated value that's going to be successful at the price we need to bid to both win and execute. It's really a decision we make on every capture. It's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So, no change there, and no difference in space than there is in other parts of our portfolio. Thank you very much.
Cai von Rumohr: But broadly speaking the doubling of that businesses backlog over the last five years to 17% CAGR in sales over that business in the last four years.
Cai von Rumohr: Both position us really well for continued.
Cai von Rumohr: Success in that in that business and there is margin rate and margin dollar expansion opportunity on top of that so we will provide more specifics as we go.
Operator: Thank you. One moment for questions. Our next question comes from Robert Stallard with Vertical Research. You may... Robert, your line is now open. I was on mute.
Cai von Rumohr: The combination of headwinds from the items, we mentioned in until wins from the continued growth on other programs. So more specifics later in the year, but we continue to be confident in the long term outlook of the space business. Okay, Great and then Kathy you flagged opportunities for increased demand for ammunition.
Robert Alan Stallard: Thanks so much. Good morning. Kathy, I just wanted to follow up on your comment at the start of... and D.O.D. I was wondering who you think could be the bill.
Robert Alan Stallard: From U S. Allies. So I was wondering if you could talk a bit more about maybe the specific ammunition products that allied is were looking to purchase from Northrop and then which regions you're seeing that demand percolate.
Kathy J. Warden: We looked at the FY25 President's Budget. It was very much in line with our expectations, so no surprises and no concerns about our portfolio. Obviously, we talked about two things where the budget was a factor. NDA choosing to down-select early on NGI was largely due to budgetary constraints.
Kathy J. Warden: I understand that there is at least one specific European supplier of ammunition to generate something like 25% operating margins off that revenue.
Speaker Change: Just curious to understand what that opportunity could mean for Northrop. Thank you.
Robert Alan Stallard: And then, of course, the Restricted Space Program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook but my comments about the FY25 budget. So there is nothing else that we see in there that is concerning. And as I noted, 24 ended up being a strong year for the investment accounts with 6% growth over 23, and we also have the supplemental on top of that. So it's early to look at 25 and where the budget environment will actually end up in the U.S. But I also just keep pointing back to international demand that's the strongest that I've seen in a long time. And so we look at global demand, not just the U.S. marketplace.
Kathy J. Warden: Yes.
Robert Alan Stallard: Of course, so as we look at our weapons portfolio today, it's about 7% of revenue, it's growing double digit and we expect that to continue a good part of that growth will be supported both by the supplemental that I spoke about in my opening comments in response to Ryan's question, but also the European demand has strengthened.
Robert Alan Stallard: We have a number of opportunities countries across Europe looking to do the exact same thing in the U S is doing in replenishing dock I'll sort of munitions and or is it not.
Robert Alan Stallard: Non standard ammo contracts that we have a business grew nicely last year, we expect that to continue this year and we also have programs like.
Robert Alan Stallard: Our gum, where theres international demand, that's a longer term proposition as we look to.
Robert Alan Stallard: Provide those products to our European allies, particularly if they feel the F 35, so a wide ranging that's from.
Kathy J. Warden: I've got a quick follow-up on that actually because you did mention exports as well, and I was wondering if they're about 14% right now. And while we don't see that moving significantly in the near term, because those opportunities I noted in the pipeline do take a while to pursue and turn into sales, we do expect that that will be a faster segment of growth than our domestic business over these next several years, just because of the richness of the pipeline. Great, thank you very much.
Kathy J. Warden: Ammunition, all the way up to tactical missiles, and then of course, our solid rocket motor facility expansion support many of our peer program like GM or Pac three.
Kathy J. Warden: <unk>.
Kathy J. Warden: Looking to the second source to support us in all of those opportunities are in the mix right.
Speaker Change: Thank you.
Speaker Change: Thank you.
Kathy J. Warden: One moment for questions.
Kathy J. Warden: Our next question comes from Myles Walton with Wolfe Research you May proceed.
Speaker Change: Thanks, Good morning, Kathy you provided the kind of international color in your opening remarks, and also a follow up to <unk>.
Kathy J. Warden: To Rob's question, but when I look at the sales disclosures, that's been pretty locked in at $5 billion for five years of absolute dollar revenue.
Operator: Thank you. One moment for questions. Our next question comes from Pete Skibitski with Alembic Global. Good morning, thanks.
Peter John Skibitski: Is there a color you can give us on the backlog that shows that this international opportunity is at least working its way into backlog if not sales.
Peter John Skibitski: Hey, Kathy, can you talk about Northrop's role in the shipbuilding supply chain, which I guess is the Marine unit in Mississippi? Just because the Navy has talked about, you know, some of the supply chain challenges in shipbuilding. You know, maybe you could just kind of assuage any concerns, maybe in terms of how that unit is performing and the growth outlook there and just kind of how you guys are managing that unit so we have a good feel that, you know, smoke doesn't turn into fire kind of scenarios.
Peter John Skibitski: In the coming year.
Kathy: Yes, so in terms of backlog what you would look to see is as we sign the RBC us deals that I mentioned with additional countries as we sign contracts for Triton, but I highlighted in the call today.
Peter John Skibitski: If you are in the early stages. The two countries progressing toward award. These are all award that would be in new franchises that we have not had in the past while we continue to see just the standard growth in areas like F 35 International and <unk>.
Kathy J. Warden: It's a critically important part of our portfolio; we're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years, it's going to deliver an amazing step function improvement in propulsion for the Columbia class submarines, and we are near delivering those first pair of turbine generators. And that's what the Secretary of the Navy was referring to, in his testimony on the Hill. We are working to address supply chain challenges. As you have heard across the entire shipbuilding enterprise, our experience is very consistent with that these programs have a long cycle. And so we only go through these development efforts once over a multi-decade period, and there's learning that happens.
Kathy J. Warden: The Titan portfolio with the Australian Bight that are already underway or our <unk> franchise with France, and Japan. So those are still in the backlog and then you'd add to that the opportunities that I highlighted this morning that our new franchises for us.
Speaker Change: Okay. So the percent of the backlog. This international has been expanding there what I think is what youre, saying.
Kathy J. Warden: It has although really what we see now is a whole set of opportunities for product lines that.
Kathy J. Warden: We're not in our backlog over the last five years. So that's the difference.
Kathy J. Warden: Our portfolio has largely been high end capabilities that are portable and you look at how the portfolio has evolved over time. These new franchises that I spoke about today or franchises like Triton now getting permissibility for export to more countries, it's really opening up a whole new set of.
Peter John Skibitski: But in this case, I think we are largely through that learning and on a path for delivery. And we're optimistic about the future ahead in being able to deliver this capability. From the financial perspective that you asked about, this is relatively small, so not something that you should think of as having a material financial impact. But that doesn't mean we don't take it very seriously.
Peter John Skibitski: Opportunities for our company.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you.
Peter John Skibitski: One moment for questions.
Peter John Skibitski: Yes.
Peter John Skibitski: Our next question comes from Gavin Parsons with UBS you May proceed.
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning.
Peter John Skibitski: Kathy you mentioned, you've finalized negotiations with additional suppliers on the B 21 were those all in line with your expectations can you share what percentage of suppliers are now locked in and then when do you expect that to be fully finalized.
Kathy J. Warden: Okay, great. Appreciate the call. Thank you. One moment for questions. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Hey, good morning.
Kathy J. Warden: So.
Scott Deuschle: We're largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers and we expect to be closing on those shortly that we're making sure that we have the best deal possible.
Scott Deuschle: Dave, just to clarify, what's the message on space growth beyond this year? Does it reaccelerate from this 4% or so this year? I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call, as is our traditional approach. I think the broader themes that we've talked about in space today are important, but you know, we've touched on the restricted program cancellation and the NGI down select.
Scott Deuschle: And that we work those negotiations diligently so not by the time barrier to the team more so an outcome.
Scott Deuschle: Set of objectives for them and they're doing quite well against those expectations and our suppliers are obviously key to us we want to make sure that they are able to as supports the investment in this program thats necessary and so we're taking our interest in wind as well.
Speaker Change: Okay, Great that's helpful and then.
Speaker Change: David maybe just on the Aeronautics margin and I think you mentioned the strength in <unk> will be a little lighter through the rest of the year, but what was <unk> as expected was that in guide or did you performed better than you thought you would in the first quarter.
David Keffer: But broadly speaking, the doubling of that business's backlog over the last five years, and the 17% CAGR in sales over that business in the last four years, both position us really well for continued success in that business. And there is margin rate and margin dollar expansion opportunity on top of that. So we'll provide more specifics as we go about the combination of headwinds from the items we mentioned and tailwinds from the continued growth of other programs. Some more specifics later in the year, but we continue to be confident in the long-term outlook of the space. Okay, great.
David Keffer: Yes.
David Keffer: First quarter was particularly strong as we mentioned that we had anticipated and opportunity for productivity gains.
David Keffer: Indirect rate driven enhancements to the margin as well this year that was baked into our guidance and the timing was such that a lot of that came in in the first quarter, which is why we've noted that.
David Keffer: We.
David Keffer: Expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gates at 10%.
David Keffer: And so while there's no single one time item in the first quarter. It was a particularly strong start and a great way to kick off the year for us.
Scott Deuschle: And then, Kathy, you flagged opportunities for increased demand for ammunition from US allies. So I was wondering if you could talk a bit more about, maybe, the specific ammunition products that US allies are looking to purchase from Northrop. In which regions are you seeing that demand percolate? I understand that there's at least one specific European supplier of ammunition generating something like 25% operating margins off that revenue. So I am just curious to understand what that opportunity could mean for Northrop. Thank you. Yes, of course.
Speaker Change: Thank you both.
Speaker Change: Thank you.
Scott Deuschle: One moment for questions.
Scott Deuschle: Our next question comes from Matt Akers with Wells Fargo. You May proceed.
Speaker Change: Hey, good morning, guys. Thanks for the question.
Scott Deuschle: I wanted to ask on Sentinel, you mentioned, you're supporting the Nunn Mccurdy reviewed just curious.
Scott Deuschle: What do you think the outcomes of that could be and if there's any risk to that program or do you think that's not the case, just given sort of how critical it is.
Kathy: Well there has been strong bipartisan support for the program. We expect that will continue and of course as the nation's policy.
Kathy J. Warden: So as we look at our weapons portfolio today, it's about 6% to 7% of revenue. It's growing double-digit, and we expect that to continue. A good part of that growth will be supported both by the supplementary that I spoke about in my opening comments in response to Ron's question, but also because European demand has strengthened. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions, and those are basic and non-standard ammo contracts that we have.
Speaker Change: As reviewed in the nuclear posture review to have three legs of our strategic insurance. So we do expect that the program will be recertified, but the government needs to take the process seriously. It's a good process and they're working through the phases of start re certification now and as I said we're.
Kathy J. Warden: Providing support to them and say.
Kathy J. Warden: Stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn mccurdy, but supporting it fully.
Speaker Change: Yes got it thanks, and I guess, one for Dave just thoughts on where EAC.
Kathy J. Warden: Any level kind of go from here you are still running.
Kathy J. Warden: Quite a quite a bit below where you were a couple of years ago. It sounds like Aes is some good good eac's, but just thoughts on the progress from here.
Scott Deuschle: That business grew nicely last year. We expect that to continue this year. And we also have programs like Argym where there's international demand. That's a longer-term proposition as we look to provide those products to our European allies, particularly as they get the F-35. So a wide-ranging set, from ammunition all the way up to tactical missiles.
Scott Deuschle: Sure I agree with your characterization that there was good progress in the first quarter.
Scott Deuschle: Youll see that further detailed in our 10-Q.
Scott Deuschle: Disclosures as well, we had been running substantially above the levels of 2022, and 2023 and prior years before the macroeconomic disruptions.
Scott Deuschle: So over time, we anticipate that we will normalize to levels more like our history and we saw progress towards that in the first quarter as you mentioned, particularly in the us but really across.
Kathy J. Warden: And then, of course, our solid rocket motor facility expansion supports many of our peer programs like GMLRS and PAC-3, looking to be a second source to support SN6. All of those opportunities are in the mix for us. Thank you.
Kathy J. Warden: Cross the business Youre seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement and the gradual decline of macroeconomic pressures and so across those three dimensions, we see an opportunity.
Operator: One moment for questions. Our next question comes from Myles Walton with Wolf Research. You may proceed. Thanks. Good morning.
Myles Alexander Walton: Cathy, you provided a ton of international color, both in your opening remarks and also follow up to Rob's question. But when I look at the sales disclosures, it's been pretty locked in at 5 billion for five years of absolute dollar revenue. So is there a color you can give us on the backlog that shows that, you know, this international opportunity is at least working its way into backlog, if not sales in the in the in the coming, Yes, so in terms of backlog, what you would look to see is, as we sign the IBCS deals that I mentioned with additional countries, as we sign contracts for Triton that I highlighted in the call today, the IVUs that are in the early stages, the two countries progressing toward awards, these are all awards that would be in new franchises that we have not had in the past.
Myles Alexander Walton: Entity to continue to see margins normalize over the next several years in Q1 was a good example of what you can anticipate there.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Myles Alexander Walton: One moment for questions.
Myles Alexander Walton: Our next question goes from Jason Gursky with Citi. You May proceed.
Myles Alexander Walton: Hey, good morning, everybody.
Speaker Change: I was wondering if I could ask you.
Myles Alexander Walton: To dive a little deep on.
Myles Alexander Walton: The space business.
Myles Alexander Walton: And two areas, starting with sensors and payloads.
Myles Alexander Walton: Talk a little bit about.
Myles Alexander Walton: <unk> line of business opportunity that you have there.
Myles Alexander Walton: Are you seeing the most interest kind of like type of sensor with the optical communications.
Myles Alexander Walton: Our RF.
Myles Alexander Walton: RF that kind of thing you just talked a little bit about the general.
Myles Alexander Walton:
Myles Alexander Walton: Ecosystem and what's going on in the sensors and payloads business that you've got there and what you are kind of excited about today.
Myles Alexander Walton: While we continue to see just the standard growth in areas like F35 International and the Triton portfolio with the Australian buys that are already underway, or our E2D franchise with France and Japan, so those are still in the backlog, and then you add to that the opportunities that I highlighted this morning that are new franchises for us. Okay, so the percent of the backlog that's international has been expanding, though, I think that really what we see now is a whole set of opportunities for product lines that were not in our backlog over the last five years. So that's the difference.
Myles Alexander Walton: Mhm.
Myles Alexander Walton: So we are seeing interest in.
Myles Alexander Walton: Modernizing really the entire architecture and space and I've been talking about this for a while so whether it's intelligence surveillance reconnaissance communications missile warning and tracking.
Myles Alexander Walton: The entire space architecture is being upgraded both in terms of advancing the capability of those sensors and payloads, but also the coverage with the broadening of the base architecture and so we are involved selectively and all of those areas. As you know we play a key role.
Myles Alexander Walton: All in ISR communications and varying forms both missile tracking and missile warning.
Kathy J. Warden: You know, our portfolio has largely been high-end capabilities that aren't exportable. And as you look at how the portfolio has evolved over time, these new franchises that I spoke about today, or franchises like Triton now getting permissibility for export to more countries, it's really opening up a whole new set of opportunities for our company. Okay, thank you.
Kathy J. Warden: So it really we.
Kathy J. Warden: We have a very broad portfolio that stretches across those areas. We don't focus on one over the other and we see them all equally attractive and really in many ways that modernization is well underway and is what has contributed to the strong growth of our backlog in space over the last few years.
Kathy J. Warden: Mhm.
Speaker Change: Okay, and maybe similar kind of.
Kathy J. Warden: Okay.
Kathy J. Warden: Discussion on the ground systems side of things and.
Myles Alexander Walton: Thank you. Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed. Thanks, good morning. Good morning. Kathy, you mentioned you've finalized negotiations with additional suppliers on the B-21. Were those all in line with your expectations?
Gavin Eric Parsons: Whether that's.
Gavin Eric Parsons: Oh the sensor payloads.
Gavin Eric Parsons: <unk> opened the space are driving the ground system business, and just kind of what the competitive environment looks like for you there.
Gavin Eric Parsons: They are and we do participate in the ground segment I'd say, our strength is more on the sensors and payloads, but we look at a full integrated solution and often are asked by the government to support them on the ground system development that go with that.
Gavin Eric Parsons: Can you share what percentage of suppliers are now locked in and when you expect that to be fully finalized? So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly. We're making sure that we have the best deal possible and that we negotiate those negotiations diligently. So I've not set a time barrier for the team, more so an outcome set of objectives for them, and they're doing quite well against those expectations.
Gavin Eric Parsons: Satellite that we're fielding and so we see that as a marketplace, where we absolutely can compete we just choose to be a bit more selective there again back to where we're more differentiated.
Speaker Change: Great. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Just have time for one more question.
Speaker Change: One moment for our last question.
Gavin Eric Parsons: And our last question comes from Peter Arment with Baird You May proceed.
Speaker Change: Yeah, Hey, good morning, caffeine, Dave a nice results.
Kevin: Hey, Kevin.
Gavin Eric Parsons: Can you can you maybe just talk a little bit about what you expect on your capex kind of profile and when we think about.
Gavin Eric Parsons: Last year, you had a big step up and things are staying elevated here, but you also have just tremendous demand signals, both domestically and internationally just how youre thinking about Wow Capex should trend have you made enough investments. It sounds like you have on the solid rocket side in microelectronics, but just thinking about you know more broadly.
Kathy J. Warden: And our suppliers are obviously key to us. We want to make sure that they are able to support the investment in this program that's necessary. And so we're taking their interest in mind as well. Okay, great. Dave, maybe just on the aeronautics margin, I think you mentioned the strength in 1Q would be a little lighter through the rest of the year, but was 1Q as expected? Was that just a guide, or did you perform better than you thought you would?
Dave: Yes, and part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year being the peak, 4% of revenue Capex expenditures and then starting to see those come down gradually more toward a normalize.
Gavin Eric Parsons: You know, the first quarter was particularly strong, as we mentioned. We had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year, and that was baked into our guidance. And the timing was such that a lot of that came in in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gates at 10%. And so, while there was no, you know, single one-time item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS. Thank you both.
Speaker Change: This level in our company still see this as a robust growth environment and so there will be investments that we're making we're committed to do that but we do not see the same demands for the investment over the next several years that we've seen over the last that's all.
Speaker Change: Very helpful. Thanks.
Speaker Change: But well thank you all for joining us on the call today, we see are off to a strong start to the year and we will carry that momentum into the following quarters as our team focuses relentlessly on delivering that technology advantage for our customers and value to our <unk>.
Speaker Change: Shareholders. So thanks again for joining us I look forward to speaking with you on our next call in July.
David Keffer: Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Hey, good morning, guys.
Speaker Change: Thank you ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
Matthew Carl Akers: Thanks for the question. I wanted to ask about Sentinel. You mentioned you're supporting the non-recovery review. Just curious what the outcomes of that could be and if there's any risk to that program? Or do you think that's not the case, just given sort of how critical it is?
David Keffer: [music].
Matthew Carl Akers: Hum.
Matthew Carl Akers: Okay.
Matthew Carl Akers: Okay.
Matthew Carl Akers: [music].
Matthew Carl Akers: Yes.
Matthew Carl Akers: Okay.
Kathy J. Warden: Well, there has been strong bipartisan support for the program, and we expect that to continue. It, of course, is the nation's policy, as reviewed in the Nuclear Posture Review, to have three legs of strategic deterrence. So we do expect that the program will be recertified. But the government needs to take the process seriously.
Matthew Carl Akers: [music].
Kathy J. Warden: Yes.
Kathy J. Warden: Hmm.
Kathy J. Warden: [music].
Matthew Carl Akers: It's a good process, and they're working through the phases of that recertification now. And as I said, we're providing support to them to stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy Act but supporting it fully. Yeah, I got it.
Matthew Carl Akers: Okay.
Matthew Carl Akers: Sure.
Matthew Carl Akers: [music].
Matthew Carl Akers: Okay.
Matthew Carl Akers: Okay.
Matthew Carl Akers: Hmm.
Matthew Carl Akers: [music].
Matthew Carl Akers: Okay.
Kathy J. Warden: Thanks. And I guess one for Dave, just thoughts on where EAC, at the company level, kind of go from here, you're still running quite a bit below where you were a couple years ago, sounds like AS is, Unknown Attendee, Scott Deuschle, Northrop Grumman, David Keffer, Cai Rumohr, Unknown, Sure, I agree with your characterization that there was good progress in the first quarter, and you'll see that further detailed in our in our 10-Q disclosures as well.
Matthew Carl Akers: [music].
Kathy J. Warden: You know, we had been running substantially above the levels of 2022 and 2023 in previous years before the macroeconomic disruptions. And so, over time, we anticipate that we will normalize to levels more like our history, and we saw progress toward that in the first quarter, as you mentioned, particularly in AS. But really, across the business, you're seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement and the gradual decline of macroeconomic pressures. And so across those three dimensions, we see an opportunity to continue to see margins normalize over the next several years, and Q1 was a good example of what you can anticipate there. Great, thank you.
Kathy J. Warden: Okay.
Kathy J. Warden: Okay.
Kathy J. Warden: Hum.
Kathy J. Warden: [music].
Kathy J. Warden: Okay.
Kathy J. Warden: [music].
Kathy J. Warden: Yes.
Kathy J. Warden: Yeah.
Kathy J. Warden: [music].
Kathy J. Warden: Hum.
Kathy J. Warden: [music].
Kathy J. Warden: Okay.
Kathy J. Warden: [music].
Kathy J. Warden: Yes.
Kathy J. Warden: [music].
David Keffer: Thank you. One moment for questions. Our next question comes from Jason Gursky with Citi. You may proceed. Good morning, everybody.
Jason Michael Gursky: Kathy, I was wondering if I could ask you to dive a little deep into the space business in two areas, maybe starting with sensors and payloads, and talk a little bit about, you know, the pipeline of business opportunities that you have there, where you're seeing the most interest in the kind of type of sensor, electro-optical communications, you know, SAR, RF, that kind of thing, and just talk a little bit about the So we are seeing interest in modernizing the entire architecture in space. And I've been talking about this for a while.
Kathy J. Warden: So whether it's intelligence, surveillance, reconnaissance, communications, missile warning, and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads, but also in terms of the coverage with the broadening of the space architecture. And so we're involved selectively in all of those areas. As you know, we play a key role in ISR communications and varying forms of both missile tracking and missile warning. So really, we feel we have a very broad portfolio that stretches across those areas. We don't focus on one over the other, and we see them all equally attractive.
Jason Michael Gursky: And really, in many ways, that modernization is well underway and is what has contributed to the strong growth of our backlog in space over the last few years. Okay, maybe, you know, similar kind of discussion on the ground systems side of things, um, you know whether that all the sensor payloads that we're launching into space are driving the ground system business, which is kind of what the competitive environment is for you there. Yeah, they are.
Kathy J. Warden: And we do participate in the ground segment; I'd say our strength is more in the sensors and payloads. But we look at a full integrated solution and are often asked by the government to support them in the ground systems development that goes with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete; we just choose to be a bit more selective there. Again, back to where we're more differentiated.
Kathy J. Warden: [music].
Jason Michael Gursky: Great, thank you. Thank you. Thank you. Hey, we just have time for one more question.
Operator: One moment for our last question. And our last question comes from Peter Arment with Baird. You may proceed. Yeah, hey, good morning, Kathy and Dave. Nice results. Hey, Kathy.
Peter J. Arment: Can you maybe just talk a little bit about what you expect on your CapEx kind of profile when we think about last year you had a big step up, and things are staying elevated here, but you also have just tremendous demand signals both domestically and internationally. Just how you're thinking about, you know, wow, CapEx. You've made enough of the investments. It sounds like you have on the solid rocket side.
Kathy J. Warden: Yes, and part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year, being the peak 4% of revenue, and CapEx expenditures, and then starting to see those come down gradually more toward a normalized level in our company. We still see this as a robust growth environment. And so there will be investments that we're making; we're committed to doing that. But we do not see the same demand for those investments over the next several years as we have seen over the last several. Very helpful, thanks.
Peter J. Arment: Well, thank you all for joining us on the call today. We are, as you see, off to a strong start to the year. And we will carry that momentum into the following quarters, as our team focuses relentlessly on delivering that technology advantage for our customers and value to our shareholders. So thanks again for joining us. I look forward to speaking with you on our next call in July.
Kathy J. Warden: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Thank you for watching!
Operator: Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Good day, ladies and gentlemen, and welcome to Northrop Grumman's first quarter 2024 conference call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode.
I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's first quarter 2024 conference call. We'll refer to a presentation that is posted on our IR website this morning. Before we start, matters discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call.
These forward-looking statements constitute forward-looking statements pursuant to the safe harbor provisions of federal securities laws. Such forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SAC filings. These risks and uncertainties may cause actual company results to differ materially.
Today's call will include non-GAAP financial measures that are reconciled to our GAAP results and our earnings. 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. Thank you, Todd. Good morning, everyone.
It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And, as you can see, we are off to a strong start to the year with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance, has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales, driven by growth in all four of our sectors.
Operator: [music].
The productivity and cost efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong, resulting in segment operating margin dollars increasing by 10 percent. Operating profit expansion, along with the lower share count, helped to drive 15% EPS growth.
Overall, our first quarter performance was in line with or better than our expectations, and we are reaffirming our 2024 company-level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the US fiscal year 2024 defense budget, which includes support for our key programs and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget and future years' defense program, or FIDET, and these also were consistent with our expectations.
We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons, and space. Together, the appropriations and FIDA give us confidence in our longer-term outlook, even if we experience a somewhat slower top-line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. These span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth.
In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IVCS product line, known as NARAS. This represents the short-range air and missile defense portion of Poland's missile defense architecture, and it will augment the medium-range portion, which is currently being deployed.
In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth-generation aircraft. This includes our iviews electronic warfare offering, which leverages the US program of record. Eyeviews has been downselected by two international partners, and we are in discussions with seven other countries.
Overall, iViews has the potential to be a new multi-billion dollar product line for us. We're also well positioned to address emerging international opportunities for autonomous systems. The first of four Triton aircraft is expected to be delivered to Australia later this year.
In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst allied nations. We believe our Triton program is well suited to meet these requirements, providing opportunities for up to five aircraft, and we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in US and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that, in aggregate, have the potential to support further growth in our defense systems portfolio at solid margins. And this week, the U.S. Congress passed supplemental funding bills that include munitions procurement and missile product capacity expansion.
Operator: [music].
As we shared in our prior call, to meet growing demand across our weapons systems business, we have been investing in our largest solid rocket motor production facility over the past five years, and we have now tripled our production capacity for tactical SRM. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization.
It will be led by our mission systems business, where over 80% of their revenue is enabled by our innovation and investment in microelectronics. Today, our U.S. microelectronics facilities produce over a million microchips a year with tailored design, fabrication, and advanced packaging needed to support the most advanced defense systems and sensors.
Speaker Change: Good day, ladies and gentlemen, and welcome to Northrop Grumman's first quarter 2024 conference call today's call is being recorded.
Josh: 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 Ernst Vice President Investor Relations. Mr. Ernst. Please proceed.
Speaker Change: Thanks, Josh and good morning, everyone and welcome to Northrop Grumman's first quarter 2024 conference call, we'll refer to a presentation that is posted on our IR website. This morning before we start matters discussed on today's call, including guidance and outlooks for 2024 and beyond reflect the company's judgment based on information information available at the time of this call.
We also work with leading-edge technology developers in the commercial space, like NVIDIA, to incorporate their technology into our national security solution. In addition to advancements in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Waynesboro, Virginia.
Operator: They constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws.
Operator: These statements involve risks and uncertainties, including those noted in today's press release, and our SEC filings. These risks and uncertainties may cause actual company results to differ materially.
With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser focused on performance and driving cost efficiencies in our business. This includes deploying systems and tools that help enable increased productivity across our. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operation.
Operator: Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.
Operator: On the call today are Kathy Warden, our chairman CEO, and President and Dave Keffer, Our CFO at this time I would like to turn the call over to Kathy Kathy.
Speaker Change: Todd Good morning, everyone. It's so good to have you joining us today. So earlier. This morning, we released our first quarter results and as you can see we are off to a strong start to the year with broad based growth across our portfolio.
Operator: The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance has positioned us for continued success.
This new system provides the foundation that supports many of the other digital transformation initiatives, and it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit to the entire team who worked tirelessly to achieve this outcome.
Operator: Growing global demand for our capabilities led to an exceptional 9% year over year increase in Q1 sales driven by growth in all four of our sectors.
Operator: The productivity and cost efficiency measures, we have been implementing are gaining traction and our program performance in the quarter was strong resulting in segment operating margin dollars increasing by 10%.
We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers. We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company.
Operator: Operating profit expansion, along with the lower share count helped to drive 15% EPS growth.
Operator: Overall, our first quarter performance was in line with or better than our expectations and we are reaffirming our 2024 company level guidance.
Operator: Global demand for our products continues to be robust fueled by rising defense budgets and our market position.
Operator: We're pleased that an agreement was reached on the U S fiscal year 2020 for defense budget, which includes support for Oxy program and represents a 6% growth in investment accounts over 2023.
Program execution is another area of particular emphasis in 2024. In our space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog, and generating strong returns in the process. This includes the progress we're making on the Sentinel Program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment, as well as the missile itself.
Operator: In March the administration released the 2025 defense budget and future Years' Defense program or fight it and.
Operator: And these also were consistent with our expectations.
Operator: We continue to see robust support for our program portfolio.
Operator: In areas that include nuclear modernization microelectronics advanced weapons and space.
Operator: Together, the appropriations and site up give us confidence in our longer term outlook, even if we experience a somewhat slower topline growth environment for the U S defense budget in the short term.
The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well. It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent.
Operator: As we look beyond the domestic market, we continue to see numerous new international opportunities as well.
Operator: Span a wide range of capabilities across our portfolio and they provide an additional avenue for sustainable and profitable growth.
We're honored to be part of this vital mission, so we're partnering with our customers and bringing the focus, resources, and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats. This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures, bringing our total investment to nearly $8 billion since the beginning of 2020.
Operator: In the first quarter, Poland signed a letter of acceptance with the U S government for an additional implementation of our <unk> product line known as <unk>.
Operator: This represents the short range Air and missile defense portion of Poland Smith for defense architecture, and it will augment the medium range portion, which is currently being deployed.
Operator: In addition to Poland, we see an IV ucs pipeline now of approximately $10 billion from numerous countries who are considering this joint Battle management system.
These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly one and a half billion in the first quarter. So, in summary, with a broad portfolio of well-supported programs, continued new domestic and international opportunities, A Relentless Focus on Performance, and a capital deployment strategy designed to create value for customers and shareholders alike, Northrop Grumman is well positioned for the future. So with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your question. Dave
Dave: Another important suite of international opportunities for Northrop Grumman is sensor modest.
Dave: Modernization of fourth generation aircraft.
Dave: This includes our I've use electronic warfare, offering, which leverages the U S program of record.
Dave: I've used has been down selected by two international partners.
Dave: And we are in discussions with seven other countries.
Dave: Overall I view this has the potential to be a new multibillion dollar product line for us.
Dave: We're also well positioned to address emerging international opportunities for autonomous systems.
Dave: The first of four training aircraft is expected to be delivered to Australia later this year in.
Dave: In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability amongst Allied nations. We believe our Triton program is well suited to meet these requirements.
Thanks. Good morning, everyone. As Kathy highlighted, we're off to a strong start to the year. Sales, operating income, and EPS all increased meaningfully from the first quarter of 2023, as we execute on our backlog and drive efficiencies in our business. Starting with our top line results on slide four in our earnings deck, first quarter sales increased 9% to $10.1 billion. We were pleased to deliver Hire Q1 sales at all four of our segments.
Operator: By adding an opportunity for up to five aircraft.
Operator: And we see additional trading opportunities emerging elsewhere in Europe.
Operator: There also continues to be an uptrend in U S and allied partner demand for missile products and ammunition.
Operator: This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our defense systems portfolio and solid margins.
Operator: And this week the U S Congress passed supplemental funding Bill, which includes munitions procurement and missile product capacity expansion.
These results were ahead of our initial projections for the first quarter, due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance. As for AS sales, they were particularly strong, up 18%, driven by higher volume on the B21 program, as well as on mature production programs like F35. Defense system sales increased 3%, primarily due to growth on multiple programs in our weapons business, and, as expected, were partially offset by lower volume on an international training program.
Operator: As we shared in our prior call to meet growing demands across our weapons systems business, we have been investing in our largest solid rocket motor production facility over the past five years, and we have now tripled our production capacity for tactical SRM.
Operator: Technology leadership is an important part of our business strategy and we've been investing to maintain our lead in microelectronics for defense applications.
Operator: To further this objective we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization.
Operator: It will be led by our mission systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics.
Mission Systems sales grew by 4%, led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABRE, and Sales at Space increased by 9% with broad-based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp. Turning to the bottom line, we remain laser focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%.
Operator: Today, our U S microelectronic facilities produce over a million micro chips, a year with tailored design fabrication and advanced packaging needed to support the most advanced defense systems and sensors.
Operator: We also work with leading edge technology developers in the commercial space like Nvidia to incorporate their technology into our National Security solutions.
Operator: In addition to advancement and capability, we are expanding our capacity in this important technology area in the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Waynesboro, Virginia.
Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mix shifts favorably, macro conditions improve, and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%.
Operator: With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions.
Operator: As I mentioned earlier, we are laser focused on performance and driving cost efficiencies in our business.
Operator: This includes deploying systems and tools that help enable increased productivity across our business.
Efficient indirect rate performance, driven by productivity initiatives and careful cost management, helped to generate a healthy volume of favorable net EAC adjustments. These adjustments were recognized across the AS portfolio but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow. We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining. Defense systems operating income grew 11%.
Operator: In the first quarter, we completed the implementation of a significant financial ERP upgrade which consolidated multiple versions of our prior system and it will significantly improve the efficiency of our operations.
Operator: This new system provides the foundation that supports many of the other digital transformation initiatives and it plays an integral role in our longer term margin expansion strategy.
Operator: The upgrade as you would understand was a massive undertaking that was.
Operator: Achieved with minimal disruption to our business, it's really a credit for the entire team who worked tirelessly to achieve this outcome.
Operator: We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers.
Operator: We saw benefits of this in the first quarter, particularly in production programs at both <unk> and D. S.
Operator: Efficiency in both direct and indirect cost management continues to be a priority across the company.
They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. For Admission Systems, segment operating income increased 5%, and the Margin Rate increased 20 basis points to 14.2%. MS's OM rate benefited from favorable mix on higher margin advanced microelectronics programs, partially upset by a lower net favorable EAC adjustment. You see opportunities to further improve performance at Microelectronics. Lastly, driven by operational efficiencies and investments we've made in our factories, space operating income increased 6%, and its margin rate was a solid 9.1%. Moving to earnings per share, on slide six, diluted EPS was $6.32 in Q1, an increase of 15% from the prior year.
Operator: Program execution is another area of particular emphasis in 2024.
Operator: In our space sector after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers executing our extensive backlog and generating strong returns in the process.
Operator: This includes the progress we're making on the Sentinel program.
Operator: We're continuing to execute the AMD phase of the program and we have made solid progress on design and development activities for the facilities and support equipment as well as the missile itself.
Operator: The nonrecurring review is continuing and we are providing support to the department of defense in that process as well.
Operator: It's a complex undertaking to modernize the U S strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that detour them.
Operator: We're honored to be part of this vital mission. So we're partnering with our customers and bringing the focus resources and talent needed to deliver on those commitments.
The increase was driven by our strong growth and segment performance, as well as higher net pension income and a lower share count. Turning to cash flow, we're pleased with our cash performance, particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 pre-cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2.
Speaker Change: Finally, I'd like to provide an update on our capital deployment strategy.
Operator: First and foremost we are investing in capabilities that meet our customers' needs to address rapidly evolving threats.
Operator: This year, we continue to expect that we will invest roughly $1 $8 billion in capital expenditures, bringing our total investment to nearly $8 billion since the beginning of 2020.
Operator: These investments have contributed to our strong growth performance and outlook.
Operator: At the same time, we are efficiently returning capital to shareholders.
Operator: <unk> nearly one 5 billion in the first quarter.
Operator: So in summary.
Operator: With a broad portfolio of well supported programs continued new domestic and international opportunities.
This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year. Moving to guidance, we are reaffirming our 2024 company-level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to one times for the year.
Operator: Our relentless focus on performance and our capital deployment strategy designed to create value for customers and shareholders alike.
Operator: Northrop Grumman is well positioned for the future.
Operator: So with that I'd like to hand, the call over to Dave and he's going to cover some of the details of our financial performance and outlook before we take your question Dave.
Note: we expect a higher ratio at AS, DS, and MS and a lower ratio at space, given all the backlog growth that has been generated in recent years and the flattening US space budget. At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results, with modest expansion in the second half. We expect the quarterly profiles to vary at the segment level, so I'll take a moment to provide some additional color.
Operator: Thanks, and good morning, everyone.
Operator: As Kathy highlighted we're off to a strong start to the year sales operating income and EPS all increased meaningfully from the first quarter of 2023, as we execute on our backlog and drive efficiencies in our business.
Operator: Starting with our top line results on slide four in our earnings deck first quarter sales increased 9% to $10 1 billion.
Operator: We were pleased to deliver higher Q1 sales at all four of our segments.
Operator: These results were ahead of our initial projections for the first quarter due in part to the timing of material volume on certain programs with that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years.
First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns. Restricted programs in MS continue to expand, and the DS weapons business has the significant demand that Kathy described, which should lead to further second half growth. Margin Rate Guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year.
Operator: Ill address the factors contributing to this as I walk through updates to our segment guidance.
Operator: Sales were particularly strong up 18% driven by higher volume on the B 21 program as well as on mature production programs like F 35.
Operator: Defense system sales increased 3%, primarily due to growth growth on multiple programs in our weapons business and as expected were partially offset by lower volume on an international training program.
Operator: Mission systems sales grew by 4% led by rapid growth on advanced microelectronics programs and our restricted portfolio, partially offset by lower volume on sabre.
At Aeronautics, we are increasing our sales guidance to the mid $11 billion to reflect our strong Q1 results and our latest projections for B21 sales timing. But the quarterly sales profile is projected to be different this year than it was in 2023.
Operator: And sales that space increased by 9% with broad based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp.
Operator: Turning to the bottom line, we remain laser focused on performance in Q1, we generated segment operating income of $1 $1 billion.
The timing of materials volume, primarily on F35 and B21, drove additional Q1 sales, so we'd expect a flatter profile through the remaining quarters. However, as our full year guidance indicates, AS margin rates are expected to be lower in subsequent quarters. Based on business mix and the strength of Q1 EAC Adjustments. For the full year, we continue to expect margins in the mid 9% range, and at Space, we're lowering our sales guidance to the low to mid $14 billion, which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the NGI decision and the contract termination in restricted space that we noted last quarter.
Operator: Year over year increase of 10%.
Operator: Margin rate was also solid at 10, 9%.
Operator: As we've outlined on previous earnings calls, we expect to increase our margin rate over time.
Operator: There's mix shifts favorably macro conditions improve and productivity measures continued to bear fruit.
Operator: Aeronautics operating income increased 25% for an operating margin rate of 10%.
Operator: Efficient indirect rate performance driven by productivity initiatives and careful cost management helped to generate a healthy volume a favorable net EAC adjustments. These.
Operator: These adjustments were recognized across the portfolio, but primarily benefited mature production programs on B 21, there were no significant changes to our Eac's and we continue to make good progress in the test phase of the AMD program and on the build of the <unk> production units inflow.
This is expected to be partially offset by continued growth in Sentinel and the SDA portfolio. Below the segment line, we are reaffirming our company-level guidance, reflecting the strength of our broad portfolio. We continue to expect corporate unallocated costs to be weighted toward the second half of the year, consistent with prior years. Interest expense will also be higher in future quarters due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%.
Operator: We have finalized negotiations with additional suppliers on the <unk> phase of the program and are in the late stages of negotiations with the remaining.
Operator: Defense systems operating income grew 11%.
Operator: Also benefited from favorable mix and indirect rate performance driving their AUM rate to 12, 5%.
Operator: At mission systems.
Operator: Segment operating income increased 5% in.
Operator: And margin rate increased 20 basis points to 14, 2%.
Operator: MFS is O&M rate benefited from favorable mix on higher margin advanced microelectronics programs.
As we've noted before, we're monitoring any changes in tax legislation and any updates in our tax appeals processes that, by their nature, are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing of our 10K. Proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025, as well as for general corporate purposes, including share repurchase. We initiated a $1 billion accelerated share repurchase program in Q1, which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion.
Operator: Partially offset by lower net favorable EAC adjustments.
Operator: We see opportunities to further improve performance at MFS drew.
Operator: Driven by operational efficiencies and the investments we've made in our factories.
Operator: Lastly space operating income increased 6%.
Operator: And its margin rate was a solid nine 1%.
Operator: Moving to earnings per share on slide six diluted EPS was $6 32 in Q1, an increase of 15% from the prior year.
Operator: The increase was driven by our strong growth in segment performance as well as from higher net pension income and a lower share count.
Operator: Turning to cash flow, we're pleased with our cash performance, particularly in light of our ERP conversion that went live in the first quarter.
Operator: This was a significant undertaking that will help to drive additional efficiencies in our business over time.
Operator: Q1 free cash flow was an outflow of approximately $1 billion and we expect a strong quarter of cash generation in Q2.
For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend. Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows from our diverse and durable portfolio. We continue to make industry-leading investments in our business to support our customers while returning excess cash to shareholders. I'm confident that this business strategy will create value for all our stakeholders.
Operator: This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year.
Operator: Moving to guidance, we are reaffirming our 2024 company level guidance and have a few updates at the segment level.
Operator: We continue to project a book to Bill ratio close to one times for the year.
Operator: No we expect a higher ratio.
Operator: DFS and MFS and a lower ratio at space given all the backlog growth that is generated in recent years and flattening U S space budgets.
In summary, we're off to a great start to the year, and we remain upbeat about our long-term outlook. And with that, let's open the call for questions. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by 1-1 on your touchtone telephone.
Operator: At the company level, we expect our second quarter sales and segment margin volume to be roughly in line with the strong Q1 results with modest expansion in the second half.
Operator: We expect the quarterly profile to very at the segment level. So I'll take a moment to provide some additional color.
Speaker Change: First D.
Operator: S and MFS sales and margin dollars are expected to ramp throughout the year generally consistent with prior year patterns.
Again, press star 1-1 to ask a question. Please limit yourself to one question and one follow-up. You may re-enter the queue for additional questions. One moment. Our first question comes from Ron Epstein with Bank of America. You may proceed. Hey, good morning, everyone.
Operator: Restricted programs and MFS continued to expand.
Ronald Jay Epstein: And the D. S weapons business has significant demand the cathie described which should lead to further second half growth.
Ronald Jay Epstein: Our margin rate guidance.
Ronald Jay Epstein: Was adjusted slightly higher Sds and slightly lower at MFS.
Kathy, if you could speak to just maybe a little more detail about that $95 billion supplemental. What potential is there for Northrop, given everything you guys have been doing in those related businesses? Yes, well, as I noted, we are pleased that the supplemental did pass this week. And as we are looking through it, there are a number of areas that align to our program portfolio, some where we are prime contractors on weapons programs, others where we are a supplier of solid rocket motors.
Operator: Reflecting our Q1 performance and latest expectations for the remainder of the year.
Operator: At Aeronautics, we are increasing our sales guidance to the mid 11 billion to reflect our strong Q1 results and our latest projections for B 21 sales timing.
Operator: But the quarterly sales profile is projected to be different this year than it was in 2023.
Operator: The timing of materials volume, primarily on F 35, and <unk> 21.
Operator: Drove additional Q1 sales so we would expect a flatter profile through the remaining quarters.
Operator: As our full year guidance indicates as margin rates are expected to be lower in subsequent quarters.
And then there is a line for additional capacity expansion. I talked about the capacity expansion that we have done for solid rocket motors in our largest production facility that, over the last several years, has enabled us to triple capacity. There is additional funding that would take that capacity even higher and reflect what's needed to support those programs that are funded in the supplemental.
Operator: Based on business mix and the strength of Q1 EAC adjustments for.
Operator: For the full year, we continue to expect margins in the mid 9% range.
Operator: In that space, we're lowering our sales guidance to the low to mid 14, billions, which roughly reflects 3% annual growth.
Operator: Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the <unk> decision and the contract termination in restricted space that we noted last quarter.
So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity that we can lay in over the coming months and years. And then maybe just a quick follow-on, if I may, with the push out of FAXX, I mean, what, how does that have, like, what strategic impact does that have on aeronautics? There are a number of opportunities in aeronautics that we are pursuing, that being one of them.
Operator: This is expected to be partially offset by continued growth in sentinel in the SBA portfolio.
Operator: Below the segment line, we are reaffirming our company level guidance, reflecting the strength of our broad portfolio.
Operator: We continue to expect corporate unallocated costs to be weighted towards the second half of the year consistent with prior years.
Operator: Interest expense will also be higher in future quarters.
It doesn't really have an impact on our near-term outlook for that business. As we shared today, we're raising the sales guidance for that business this year, and that's really on the strength of the current portfolio and the growth that we continue to see there. But we will continue to pursue additive opportunities, the Navy program being one of them. Great, thank you very much.
Operator: Due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%.
Operator: As we've noted before.
Operator: We're monitoring any changes in tax legislation and any updates in our tax appeals processes that by their nature are not factored into our guidance.
Operator: And as a reminder, we completed a $2 5 billion debt offering at attractive rates. Shortly after the filing of our 10-K.
Operator: Proceeds will be used in part to retire $1 5 billion of notes that are maturing in January 2025, as well as for general corporate purposes, including share repurchases.
One moment for questions. Our next question comes from Doug Arnett with Bernstein. You may proceed. Good morning.
Thank you. You talked a little bit about Outlook for Book-to-Bill this year, and the backlog was down in each segment in Q1. I understand some of the space issues, but on ASDS and MS, if you're looking at a book-to-bill of above one for the year, can you talk about where that's likely to come from? What will drive those business units since the backlog was down in Q1? Yes, Doug. As we've talked about before, awards can be very lumpy. And so we tend to look at our book to bill over a longer stretch of time, and our last two years have been well over one.
Doug Arnett: We initiated a $1 billion accelerated share repurchase in Q1, which is now nearly complete.
Operator: In total, including our open market purchases are Q1 repurchases were $1 2 billion.
Operator: For the full year, we have increased our expectations for share repurchases to greater than $2 billion.
Operator: We also remain committed to providing a strong and growing dividend.
Operator: Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows and our diverse and durable portfolio. We continue to project industry, leading investments in our business to support our customers, while returning excess cash to shareholders.
Operator: We're confident that this business strategy will create value for all our stakeholders.
So we expected this first quarter to be lighter; we had signaled that, as we look at the full year, we still believe that we'll be near one. And it's largely going to be driven by our shorter cycle businesses. So think mission systems and defense systems, and space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last four years, and the book to builder has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them. And then, just on space, you mentioned the importance of Sentinel.
Operator: Summary.
Speaker Change: Off to a great start to the year and we remain upbeat about our long term outlook and with that let's open the call for questions.
Speaker Change: Thank you.
Speaker Change: 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 wanted to ask a question. Please limit yourself to one question and one follow up you may reenter the queue for additional questions one moment.
Operator: Hi.
Operator: Our first question comes from Ron Epstein with Bank of America, You May proceed.
Speaker Change: Hey, Yeah, good morning, everyone.
Operator: Cathy if you could speak to just maybe a little more detail.
Operator: $95 billion of supplemental.
Operator: Oh.
Operator: What potentially is in there for Northrop given everything you guys have been doing.
Operator: And those related businesses.
Speaker Change: Yes, well as I noted we are pleased that the supplemental did pass this week and we are looking through it there are a number of areas that align to our program portfolio.
And, you know, and we talked over the last quarter about some of the issues, the non-McCurdy breach and those issues. But when you look at the Air Force moving, moving the IOC schedule back by two years, how does that affect your growth path? We had talked about Sentinel growth coming, flattening out for a few years, and then returning to growth as we moved into the production phase later in the decade.
Operator: Where we are prime and weapons programs, others, where we are a supplier of solid rocket Motors and then there is a line for additional capacity expansion I talked about the capacity expansion that we have John for solid rocket motors and our largest production facility that over the last several year.
Operator: <unk> has enabled us to triple capacity. There is additional funding that would take that capacity, even higher and reflects what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity.
That still holds true. That timing has, of course, moved as the program schedule is moving, but the profile is still quite similar to what we have been discussing. And it was so far out in the future that it really wasn't in any of the projections that we had for 24 or even 25. It was well beyond that.
Operator: We can wait in the coming months and years.
Speaker Change: And then maybe just a quick follow on if I may.
Operator: With the push out of S X X I mean.
Still, a healthy ramp is expected for that program, and we are laser focused on delivering and meeting the schedule commitments that we are working toward with the Air Force. Okay, very good. Thank you. Thank you. One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Hey, good morning, Kathy and Dave. Good morning.
Operator: How's that.
Kristine Tan Liwag: Strategic impact itself.
Kristine Tan Liwag: On the Aeronautics business.
Kristine Tan Liwag: There are a number of opportunities in aeronautics that we are pursuing that being one of them. It doesn't really have an impact on our near term outlook for that business.
Kristine Tan Liwag: We shared today, we're raising the sales guidance for that business. This year and that's really on the strength of the current portfolio and the growth that we continue to see there, but we will continue to pursue additive opportunities.
Kristine Tan Liwag: The Navy program being one of them.
You know, the Air Force lowered its near-term requested funding levels for B-21 in the Fiscal Year 25 budget proposal, and they talked about lower negotiated prices on low-rate production. How does this change alter the economics of the program and risks of incremental charges? It doesn't change the economics of the program. What happened is the budget was set based on independent cost estimates, and as we move towards the contract phase where LRIC was exercised, the first option, the government is now reconciling to our contract value. There was no change in price, schedule, or quantities.
Kristine Tan Liwag: Great. Thank you very much.
Kristine Tan Liwag: Thank you.
Operator: One moment for questions.
Operator: Our next question comes from Doug <unk> with Bernstein you May proceed.
Operator: Hi, good morning, Thank you.
Operator: Tom.
Operator: <unk>.
Operator: You talked a little bit about about outlook for book to Bill This year and the backlog was down in each segment in Q1.
Operator: I understand some of the space issues, but on an <unk> if youre looking at a book to bill of above one for the year.
Operator: Can you talk about.
Operator: Where that's likely to come from what's what will what will drive those business units since the <unk>.
Operator: Backlog was down in Q1.
Speaker Change: Yes, Doug as we've talked about before awards can be very lumpy and so we tend to look at our book to bill over a longer stretch of time and our last two years have been well over one. So we expected this first quarter to be lighter we had signaled that as we look at the full year.
It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their independent cost estimate. Very great, thank you for the color. Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu on Jeffrey's You May Proceed. Good morning, everyone.
Sheila Karin Kahyaoglu: We still believe that we'll be near one and it's largely going to be driven by our shorter cycle businesses. So think mission systems and defense systems.
Sheila Karin Kahyaoglu: This space will clearly the lowest as we digest the Mci loss and of course, the cancellation that we had in the first quarter, but I'll remind you our space business has nearly doubled over the last four years and the book to Bill There has been incredibly strong. So there is still carrying a large backlog of business that support.
Thank you so much. Kathy, I wanted to ask you about DS. Maybe can you talk about the puts and takes there just given the supply chain, as well as services and incremental opportunities such as IBCS and missile systems? How do you think about the trajectory just given some of the positive movements we've seen in missiles and missile defense and, obviously, supplementals, and the driver of potential margin improvement there? Yes, so our defense systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has been slottish.
Operator: The growth rates that we're projecting for them.
Operator: Well and then just on space you mentioned the <unk>.
Operator: <unk> central and <unk>.
Operator: And you've talked over the last quarter about some of the non maturity breach and those issues, but when.
Operator: When you look at the and at the Air Force moving moving the IOC schedule back by two years, how does that affect your growth path on centennial.
Operator: We had talked about certain no growth coming.
And this year, we talked about a headwind in that business to growth associated with an international training program. You see that weighing a bit on first quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other two portions of the business more and more as that next shift toward weapons and our battle management portfolio, that's where IVCS fits. I spoke on today's call about some of those opportunities, both domestically and internationally, in the weapons and the IVCS portfolios. And so we expect those to contribute to growth.
Operator: Flattening out for a few years and then returning to growth as we moved into the production phase later in the decade that still holds true that timing has of course moved as the program schedule is moving but the profile still is quite similar to what we have been discussing and it was so far out.
Operator: In the future it really wasn't in any of the projections that we had in 24 or even 25, it was well beyond that.
Operator: Still a healthy ramp as expected for that program and we are laser focused on delivering and meeting the schedule commitments that we're working toward with the Air Force.
And they are also higher-margin than our sustainment business. So as that next shift, so will margins improve. Thank you.
Speaker Change: Okay very good thank you.
One moment for questions. Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Hey, thanks very much and good morning.
Speaker Change: Thank you.
Seth Michael Seifman: One moment for questions.
Operator: Our next question comes from Cristina <unk> with Morgan Stanley You May proceed.
Seth Michael Seifman: Hey, good morning, Kathy or Dave.
I wanted to ask about autonomous aircraft and, you know, the CCA program. We saw last night the news about Andrio being selected along with General Atomics. And I was wondering, you know, if you could, with that news, maybe, you know, update us on Northrop's strategy to capture new work in the autonomous space. Yeah, so we're obviously disappointed to learn that we weren't selected for this phase of the CCA program.
Seth Michael Seifman: Good morning.
Seth Michael Seifman: The Air Force lowered its near term requested funding levels for 'twenty, one and the fiscal year 'twenty five budget proposal and they talked about lower negotiated prices on low rate production. How does this change alter the economics of the program.
Operator: And risks of incremental charges.
Operator: It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates and as we move towards the contract.
Operator: <unk> was exercised the first stops and the government is now reconciling to our contract value. There was no change in price schedule quantity. It's just a reflection of that moving off of an independent estimate and moving to our contract value which of course was <unk>.
The US Air Force has described this acquisition strategy as a continuous competition, and they're already outlining future phases, so we'll see what that presents in terms of future entry points. We also see other services in the US, and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy for autonomy, but we'll monitor how the CCA program progresses and incorporate any learnings that we have into those future opportunities.
Operator: Then theyre independent cost estimate.
Speaker Change: Great. Thank you for the color.
Speaker Change: Thank you.
Operator: One moment for questions.
Operator: Our next question comes from Sheila <unk> with Jefferies. You May proceed.
Speaker Change: Good morning, everyone. Thank you so much.
Speaker Change: Kathy I wanted to ask about.
Operator: Maybe can you talk about the puts and takes there just given supply chain as well as services and incremental opportunities such as <unk> and missile systems. How do you think about the trajectory just given some of the positive momentum seen in nickel.
And for us, you didn't ask, but this phase of the program was relatively small; we didn't have it assumed in our plan. So there's no impact on the guidance that we shared this morning for the AF sector. Okay, okay, great.
Operator: The missile defense and obviously supplemental.
Operator: And the driver of potential margin improvement there.
Operator: Yes, so our defense systems portfolio has been undergoing a transformation over the past several years, just even though we divested the services business and we still have a sustained mentioned modernization business.
And then maybe a follow-up on it, you know, when you think about where you want to be focused in autonomy, I guess the legacy of the company is more on the exquisite side, you know, and there will probably be some demand for that, but also, you know, demand for quantity, which requires affordability. You know, do you plan to pursue opportunities in both of those, you know, sub markets, or really focus more on that kind of legacy, exquisite piece of the market? You know, we are obviously working toward affordability in our product line. So we do not want to be viewed as only offering exquisite and expensive technology.
Operator: Business has been flattish and this year, we talked about the headwinds in that business to growth associated with an international training program, you will see that weighing a bit on first quarter growth in GFS being 3% overtime, we expect that growth rate to reflect the other two portions of.
Operator: The business more and more as that mix shifts toward weapons and our battle management portfolio, that's where IBP upset I spoke to on today's call about some of those opportunities.
Operator: Both domestically and internationally in the weapons and CIBC us portfolio and so we expect those to contribute to growth and they are also higher margin than our sustainment business. So as that mix shifts so will margins improve.
So we've been working to drive down the cost of our offerings. And I think we have quite a compelling offering on CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customers need against a high-end threat. However, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Operator: One moment for questions.
Operator: Our next question comes from Seth Sigman with Jpmorgan you May proceed.
Speaker Change: Okay, Thanks, very much and good morning.
Speaker Change: Good morning.
Operator: Kathy I wanted to ask on.
Operator: Autonomous.
Operator: Aircraft and the CCA program, what we saw last night the news about <unk> selection, along with general Atomics and I was wondering if you can with that news maybe update us on Northrop strategy to capture new work in the autonomous space.
That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant. Great. Thank you very much.
Speaker Change: Yeah. So we're obviously disappointed to learn that we werent selected on the face of the CCA program. The U S. Air Force has described this acquisition strategy is a continuous competition out there already outlining future phases. So we'll see what that presents in terms of future entry point, we also.
Thank you. One moment for questions. Our next question comes from David Strauss with Barclays. You may proceed. Thanks. Good morning.
Kathy, one question about MS margins. You know, a couple of years ago, we were running in the 15 level; they stepped down a little bit. Last year, you took down the margin guy there. Can you just kind of talk about what's driving the lower margins? Is it just, is it just solely mixed?
David Egon Strauss: See the other services in the U S and I talked about international partners as well continuing to look to add to their autonomous vehicle fleets and so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy and autonomy, but we'll monitor how the CCA program progresses.
Operator: And we'll incorporate any learnings that we have into those future opportunities.
That's, that's driving the lower margin of the MS? It's a bit of a mix, as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they're still at a high watermark.
Kathy: For US you didn't ask but this phase of the program was relatively small we didn't have it assumed in our plan. So there's no impact to the guidance that we shared this morning for the <unk> sector.
Speaker Change: Okay, Okay, Great and then maybe a follow up on it when you think about where you want to be focused.
And there also is a productivity element to the story. We've talked about supply chain disruption as we have scaled, and we are also increasing the scale of that business. You see a mid-single-digit level growth in mission systems, but with price coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business, based on those productivity improvements that we expect to achieve throughout the year. Okay, I got it. And then. Similar question over on the space side, so you took down the top line.
Operator: And autonomy I guess the legacy of the company is more on the exquisite side.
Operator: And there will probably be some demand for that but also.
Operator: Demand for quantity, and which which requires affordability.
Operator: Do you plan to pursue opportunities in both of those.
Operator: Markets were really focused more on that kind of legacy exquisite piece of the market.
Operator: We are obviously working toward affordability in our product line. So we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings and I think we had quite a compelling offering.
Unknown Attendee, Scott Deuschle, Northrop Grumman, Unknown Attendee, Scott Deuschle, Unknown Attendee, Scott Deuschle, Unchanged at nine. But, you know, I guess the NGI loss and just a little bit slower growth could actually help enhance the margin size? Yes, as we look at the slower growth, it is largely development programs that are dilutive to both the base margin rate and the company margin rate. So as that part of the business is no longer as significant, you will see that both the margin and cash tailwind because there were also CapEx investment plans that we will not expend in those programs now either. Thanks very much.
Operator: And can compete in that marketplace.
Operator: We are really positioned to provide the best solutions that our customer needs against the high end threat. However, we are not looking to compete in a more commoditized part of the market, it's very low cost and not survivable system. That's just not our business model and we know that that will remain.
Operator: Disciplined in where we invest and the pieces of the market that we pursue but we think that what we provided is still highly relevant.
Yes. Thank you. One moment for questions. Our next question comes from Kaivan Rumohr with T.D. Cowan.
Speaker Change: Great. Thank you very much.
Cai von Rumohr: Thank you.
Cai von Rumohr: One moment for questions.
Operator: Our next question comes from David Strauss with Barclays. You May proceed.
You may proceed. Yes, thank you so much, and good performance, Kathy. Following up on Dave's focus on space, I think I've got two questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue? Is there any chance that that function or that program might reappear again in the future?
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning.
Operator: Kathy I wanted to ask about EMS margins.
Operator: A couple of years ago, we were running in the 15 level. They stepped down a little bit last year, you took down the margin guide there could you just.
Operator: Talk about what what's driving the lower margins is it just is it just solely mix.
And secondly, you know, at the FDA business, you basically decided not to bid on one contract. Is that, as a group, profitable? Because every time I look, there's another new small supplier coming in, and they're all fixed price.
Operator: What's driving the lower margins.
Operator: It's a bit of mix as we've been talking about they have a higher cost plus next now than they have.
Operator: Historically, and we expect that to shift over time, but they are still at a high watermark and there also is a productivity element to the story, we've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business you see a mid single digit level grew.
Our contract. So let me start with your first question on the restricted program. There's very little I can say given the nature of that program, except to say that the Air Force canceled that program, largely due to budgetary concerns and prioritization, but the requirement likely still exists.
Operator: <unk> in mission systems, but with price coming down on microelectronics, it's actually a much higher volume ramp.
Operator: And is reflected in the total sales growth of the business. So as we have climbed that ramp productivity has taken a bit of a dip, but as we said we're focused on getting back to our prior performance levels at now this higher volume level and we see that something that the team is very capable.
And so we will see how that plays out over time. I will also, as we look at the broader space portfolio, answer your SDA question more generally. We see a whole variety of opportunities that we can pursue. So we're simply selective about which ones we're best positioned to win, where we think that we can price competitively, and with SDA, we've been quite successful, and those programs are profitable, but that's because we're remaining disciplined and choosing where we can best compete and win with a reasonable fee and a probability of success.
Operator: It was doing and that's why you see a margin profile.
Operator: Always is a it started a little slower and ramp through the year for MFS, but youll see it again reflected this year based on those productivity improvements that we expect to achieve throughout the year.
Speaker Change: Okay got it and then.
Operator: Similar question over on the space side. So you took down the top line.
Operator: There I assume that was partially in Gi.
Operator: The slower growth should we see that potentially reflect itself in a little bit better margin profile I know you kept the margin guidance.
But you did not bid on that one program, you know, as we move forward, is the pricing here getting a little bit more competitive as more people join the party? You know, the way I think about bid strategies is, if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't.
Operator: Change the ignite but.
Operator: Yes, the NPI Lawson, just a little bit slower growth could that actually help the hope enhance the margin side of things.
Operator: Yes.
Operator: We look at the slower growth it is largely development programs.
Operator: Are dilutive to the bill space margin rate than the company margin rate. So.
And so we don't bid when we don't feel like we have a differentiated value that's going to be successful at the price we need to bid to both win and execute. It's really a decision we make on every capture. It's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So, no change there, and no difference in space than there is in other parts of our portfolio. Thank you very much.
Operator: That part of the business is no longer as significant you will see that be both.
Operator: Both margin and cash tailwind because there was also capex investments plans that we will not extend in the program.
Operator: I'll either.
Speaker Change: Thanks very much.
Operator: Yes.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Cai von rumor with TD Cowen You May proceed.
Thank you. One moment for questions. Our next question comes from Robert Stallard with Vertical Research. You may. Robert, your line is now open. I was on mute.
Operator: Yes.
Speaker Change: Yes. Thank you so much and good performance Kathy so.
Robert Alan Stallard: Following up on Dave's focus on space I think I've got two questions first the restricted program that was canceled.
Thanks so much. Good morning. Kathy, I just wanted to follow up on your comment at the start of... and DOD. I was wondering who you think could be the bill.
Robert Alan Stallard: Is there any chance we heard a rumor it might've been related to a supplier issue.
Robert Alan Stallard: Is there any chance that that function or that program Mike.
Speaker Change: Reappear again in the future and secondly.
We looked at the FY25 President's Budget. It was very much in line with our expectations, so no surprises and no concerns about our portfolio. Obviously, we talked about two things where the budget was a factor. NDA choosing to down-select early on NGI was largely due to budgetary constraints.
Robert Alan Stallard: If the FDA.
Operator: Business.
Operator: <unk> basically decided not to bid.
Operator: One contract is that.
Operator: As a group are those profitable contracts because every time I look there was another new small supplier coming in and they're all fixed price car.
And then, of course, the Restricted Space Program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook but my comments about the FY25 budget. So nothing else that we see in there that is concerning. And, as I noted, 24 ended up being a strong year for the investment accounts with 6% growth over 23. And we also have the supplemental on top of that.
Operator: Contract.
Speaker Change: So let me start with your first question on the restricted program. There is very little I can say given the nature of that program, except to say that.
Operator: The Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist and so we will see how that plays out over time.
Operator: Also as we look at the broader space portfolio will answer your SDA question more generally.
Operator: A whole variety of opportunities that we can pursue so we're simply selective on which ones. We're best positioned to win where we think that we can price competitively.
So it's early in looking at 25 and where the budget environment will actually end up in the U.S. But I also just keep pointing back to international demand, which is the strongest that I've seen in a long time. And so we look at global demand, not just the U.S. marketplace.
Operator: And with FCA, we've been quite successful and those programs are profitable.
Operator: But that's because we're remaining disciplined in choosing where we can best compete win with a reasonable T. Yeah.
I've got a quick follow-up on that actually because you did mention exports as well, and I was wondering if they're about 14% right now. And while we don't see that moving significantly in the near term, because those opportunities I noted in the pipeline do take a while to pursue and turn into sales, we do expect that that will be a faster segment of growth than our domestic business over these next several years, just because of the richness of the pipeline. Great, thank you very much.
Operator: Probability of success.
Operator: But you did know bid that one program.
Operator: We move forward is the pricing here getting a little bit more competitive as more people joined the party.
Operator: The way I think about bid strategies is.
Operator: If there is an area where you have a differentiated value. Then you are going to be able to price. Accordingly, if you don't you want and so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to.
Thank you. One moment for questions. Our next question comes from Pete Skibitski with Alembic Global. You may proceed. Yeah, good morning.
Peter John Skibitski: Both win and execute it's really a decision we make on every capture is fundamental to the way we bill.
Thanks. Hey, Kathy, can you talk about Northrop's role in the shipbuilding supply chain, which I guess is the Marine unit in Mississippi? Just because the Navy has talked about, you know, some of the supply chain challenges in shipbuilding, you know, maybe you could just kind of assuage any concerns, maybe in terms of how that unit is performing, and the growth outlook there, and just kind of how you guys are managing that unit so we have a good feel that, you know, smoke doesn't turn into fire kind of scenarios. Absolutely.
Peter John Skibitski: Commit and execute as well as.
Operator: Deliver the returns that we effect so no change there and no different in this space than it is in other parts of our portfolio.
Operator: Thank you very much.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Robert Stallard with vertical research you May proceed.
Operator: Robert Your line is now open.
Kathy: Sorry, I was on mute. Thanks, so much good morning.
Operator: Earnings.
Operator: Kathy I just wanted to follow up on your comments at the start of the call. We talked about the FY 'twenty five request and DLD spending leveling off I was wondering do you think could be the bill payers in that budget scenario, whether there's any vulnerability in the Northrop Grumman portfolio. Thank you.
It's a critically important part of our portfolio; we're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years, it's going to deliver amazing step function improvements in propulsion for the Columbia class submarines, and we are near delivering those first pair of turbine generators. And that's what the Secretary of the Navy was referring to, in his testimony on the hill, we are working to address supply chain challenges. As you have heard across the entire shipbuilding enterprise, our experience is very consistent with that these programs are long-cycle. And so we only go through these development efforts once over a multi-decade period, and there's learning that happens.
Operator: We looked at the FY 'twenty five.
Operator: The President's budget is very much in line with our expectations. So no surprises.
Operator: No concerns about our portfolio, obviously, we talked about two things where budget was the factor in da choosing to down select early on NCI was largely due to budgetary constraints and then of course the restricted space program that we mentioned, but those we have now digested and of course reflected not.
Operator: In our outlook, but my comments about the FY 'twenty budget, so nothing else that we see in there that is concerning and.
Operator: As I noted 24 ended up being a strong year for the investment account with 6% growth over 23.
Operator: And we also have the supplemental on top of that so it's early in looking at 'twenty fives, and whereas the budget environment will actually ends up in the U S.
But in this case, I think we are largely through that learning and on a path for delivery. And we're optimistic about the future ahead in being able to deliver this capability. From the financial perspective that you asked about, this is relatively small, so not something that you should think of as having a material financial impact. But that doesn't mean we don't take it very seriously.
Operator: So just keep pointing back to international demand is the strongest I've seen in a long time and so we look at global demand not just the U S marketplace.
Speaker Change: I've got a quick follow on on that actually because you did mention exports as well and I was wondering if you could give us an update on that what sort of scale as a percentage of revenues exports are at the moment of what that could grow to in the future.
Operator: There are about 14% right now and why are we don't see that moving significantly in the near term because there is opportunities I noted in the pipeline do take a while to prosecute and turn into sales.
Operator: We do expect that that will be a faster segments of growth than our domestic business over these next several years just the richness of the pipeline.
Okay, great. Appreciate the call. Thank you. One moment for questions. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Hey, good morning.
Scott Deuschle: Alright, Thank you very much.
Scott Deuschle: Thank you.
Scott Deuschle: One moment for questions.
Peter John Skibitski: Our next question comes from Pete's Kubicki with Alembic Global you May proceed.
Scott Deuschle: Hey, good morning. Thanks.
Dave, just to clarify, what's the message on space growth beyond this year? Does it reaccelerate from this 4% or so this year? I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call, as is our traditional approach. I think the broader themes that we've talked about in space today are important, but you know, we've touched on the restricted program cancellation and the NGI down select.
Scott Deuschle: Kathy can you talk about northrop's rule in the shipbuilding supply chain, which I guess is the marine unit in MFS, just because of the Navy has talked about some of the supply chain challenges in shipbuilding, Yes, maybe you could just kind of a schwab has any concerns maybe in terms of how that unit is performing and in the <unk>.
Operator: The outlook, there and just kind of how you guys are managing that unit to just.
Operator: So we have a good feel that.
Operator: Smoke doesn't turn into fire kind of scenarios.
Speaker Change: Absolutely. It's a critically important part of our portfolio, we're very focused on delivering for our customers in that portfolio and there has been challenges that we own we have been working on a development program for nearly 10 years, its going to deliver an amazing step function improvements in propel.
But broadly speaking, the doubling of that business's backlog over the last five years, and the 17% CAGR in sales over that business in the last four years, both position us really well for continued success in that business. And there is margin rate and margin dollar expansion opportunity on top of that. So we'll provide more specifics as we go about the combination of headwinds from the items we mentioned and tailwinds from the continued growth of other programs.
Operator: <unk> for the Columbia class submarines, and we are near delivering those first pair of turbine generators and that's what the secretary of the Navy was referring to.
Operator: His testimony on the Hill.
Operator: Our.
Operator: Working to address supply chain challenges as you have heard across the entire shipbuilding enterprise our experience is very consistent.
Operator: With that these programs are long cycle and so we only go through these development efforts once over a multi decade period and there's learning that happens, but in this case I think we're largely through that learning and on a path for delivery.
Some more specifics later in the year, but we continue to be confident in the long-term outlook of the space. Okay, great. And then, Kathy, you flagged opportunities for increased demand for ammunition from US allies. So I was wondering if you could talk a bit more about maybe the specific ammunition products that allies are looking to purchase from Northrop, in which regions you're seeing that demand percolate. I understand that there is at least one specific European supplier of ammunition that generates something like 25% operating margin on that revenue.
Operator: We're optimistic of the future ahead, and being able to deliver this capability from a financial perspective that you asked about is relatively small so not something that you should think of as having a material financial impact, but that doesn't mean, we don't take it very seriously.
Speaker Change: Okay, Great I appreciate the color.
Speaker Change: Thank you.
Operator: One moment for questions.
Operator: Our next question comes from Scott <unk> with Deutsche Bank You May proceed.
Speaker Change: Hey, good morning, Dave just to clarify what's the message on space growth beyond this year does it reaccelerate off this 4% or so this year.
Kathy: Yes, I appreciate the question as you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year.
So I'm just curious to understand what that opportunity could mean for Northrop. Thank you. Yes, of course.
Kathy: And provide some indications on the October call as is our.
So as we look at our weapons portfolio today, it's about 6 to 7% of revenue. It's growing double-digit, and we expect that to continue. A good part of that growth will be supported both by the supplementary that I spoke about in my opening comments in response to Ron's question, but also because European demand has strengthened. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions. And those are the basic and non-standard ammo contracts that we have.
Kathy: <unk> approach.
Kathy: I think the broader themes that we've talked about in space today are important.
Operator: You touched on the restricted program cancellation in the NCI down select.
Operator: But broadly speaking the doubling of that businesses backlog over the last five years to 17% CAGR in sales over that business in the last four years.
Operator: Both position us really well for continued.
Operator: Our success in that in that business and there is margin rate and margin dollar expansion opportunity on top of that so we will provide more specifics as we go about the combination of headwinds from the items, we mentioned in until wins from the continued growth on other programs so more specifically.
Operator: In the year, but we continue to be confident in the long term outlook of the space business. Okay, Great and then Kathy you flagged opportunities for increased demand for ammunition from U S. Allies. So I was wondering if you could talk a bit more about maybe the specific ammunition products that allied is were looking to purchase from Northrop and then.
That business grew nicely last year. We expect that to continue this year. And we also have programs like Argym where there's international demand. That's a longer-term proposition as we look to provide those products to our European allies, particularly as they get the F-35. So a wide-ranging set, from ammunition all the way up to tactical missiles.
Operator: Which regions you are seeing that demand percolate.
Operator: Understand that there is at least one specific European supplier of ammunition to generate something like 25% operating margins off that revenue.
And then, of course, our solid rocket motor facility expansion supports many of our peer programs like JMLRS and PAC-3, looking to be a second source to support S&6. All of those opportunities are in the mix for us. Thank you. Thank you.
Speaker Change: I was just curious to understand what that opportunity could mean for Northrop. Thank you.
Operator: Yes.
Operator: Of course, so as we look at our weapons portfolio today, it's about 7% of revenue, it's growing double digit and we expect that to continue a good part of that growth will be supported both by the supplemental that I spoke about in my opening comments.
Operator: Sponsor Ron's question, but also the European demand has strengthened.
Our next question comes from Myles Walton with Wolf Research. You may proceed. Thanks, good morning. Cathy, you provided a ton of international color, both in your opening remarks and also in the follow-up to Rob's question. But when I look at the sales disclosures, it's pretty locked in at $5 billion for five years of absolute dollar revenue.
Myles Alexander Walton: There are opportunities countries across Europe looking to do the exact same thing in the U S is doing in replenishing stockpiles are munitions and sales or is it not.
Myles Alexander Walton: Nonstandard ammo contracts that we have.
Myles Alexander Walton: It grew nicely last year, we expect that to continue this year and we also have programs like argon, whether it's international demand that's a longer term proposition as we look to.
So is there any color you can give us on the backlog that shows that this international opportunity is at least working its way into the backlog, if not sales in the coming? Yes, so in terms of backlog, what you would look to see is, as we sign the IVCS deals that I mentioned with additional countries, as we sign contracts for Triton that I highlighted in the call today, the IVUs that are in the early stages, the two countries progressing toward awards, these are all awards that would be in new franchises that we have not had in the past.
Operator: Provide those products to our European allies, particularly if they feel the F 35, so a wide ranging that's from.
Operator: Ammunition, all the way up to tactical missiles, and then of course, our solid rocket motor facility expansion support many of our peer program like GM or a top three.
Operator: <unk>.
Operator: <unk> to be a second source to support us in sick all of those opportunities are in the mix right.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Operator: Our next question comes from Myles Walton with Wolfe Research you May proceed.
Speaker Change: Thanks, Good morning, Kathy you provided a ton of international color.
Operator: In your opening remarks, and also a follow up too.
While we continue to see just the standard growth in areas like F35 International and the Triton portfolio with the Australian buys that are already underway, or our E2D franchise with France and Japan, so those are still in the backlog, and then you add to that the opportunities that I highlighted this morning that are new franchises for us. Okay, so the percent of the backlog that's international has been expanding, though, I think it has, although really, what we see now is a whole set of opportunities for product lines that were not in our backlog over the last five years. So that's the difference.
Operator: To Rob's question, but when I look at the sales disclosures, that's been pretty locked in at $5 billion for five years of absolute dollar revenue.
Operator: Is there a color you can give us on the backlog that shows that this international opportunity is at least working its way into backlog if not sales.
Operator: The coming year.
Speaker Change: Yes, so in terms of backlog what you would look to see is as we signed the <unk> deals that I mentioned with additional countries as we sign contracts for Triton, but I.
Operator: Highlighted in the call today.
Operator: If you are in the early stages two countries progressing toward awards. These are all award that would be in new franchises that we have not had in the past while we continue to see just the standard growth in areas like F 35 International.
You know, our portfolio has largely been high-end capabilities that aren't affordable. And if you look at how the portfolio has evolved over time, these new franchises that I spoke about, or franchises like Triton now getting permissibility for export to more countries, it's really opening up a whole new set of opportunities for our company. Okay, thank you.
Operator: The Titan portfolio with the Australian Bight that are already underway or our <unk> franchise with France, and Japan. So those are still in the backlog and then you'd add to that the opportunities that I highlighted this morning that our new franchises for us.
Thank you. Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed. Thanks. Good morning. Good morning.
Kathy, you mentioned you've finalized negotiations with additional suppliers on the B-21. Are those all in line with your expectations? Can you share what percentage of suppliers are now locked in and when you expect that to be fully finalized? So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly. We're making sure that we have the best deal possible and that we work those negotiations diligently.
Gavin Eric Parsons: Okay. So the percent of the <unk>.
Operator: <unk> International has been expanding there what I think is what youre, saying.
Kathy: It has although really what we see now is a whole set of opportunities for product lines that we're in.
Operator: Not in our backlog over the last five years. So that's the difference.
Operator: Portfolio has largely been high end capabilities that are portable.
Operator: And if you look at how the portfolio has evolved over time. These new franchises that I spoke about today or franchises like Triton now getting permissibility for export to more countries. It's really opening up a whole new set of opportunities for our company.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Thank you.
Operator: One moment for questions.
Operator: Yes.
Operator: Our next question comes from Gavin Parsons with UBS you May proceed.
So I've not set a time barrier for the team, more so an outcome set of objectives for them, and they're doing quite well against those expectations. And our suppliers are obviously key to us. We want to make sure that they are able to support the investment in this program that's necessary, and so we're keeping their interests in mind as well. Okay, great. And then, Dave, maybe just on the aeronautics margin, I think you mentioned the strength in 1Q would be a little lighter through the rest of the year, but was 1Q as expected? Was that just a guide, or did you perform better than you thought you would?
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning.
Operator: Kathy you mentioned, you've finalized negotiations with additional suppliers on the B 21 were those all in line with your expectations can you share what percentage of suppliers are now locked in and then when do you expect that to be fully finalist.
Dave: So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter.
Operator: We are far along in negotiations with all of our suppliers and we expect to be closing on those shortly that we're making sure that we have the best deal possible and that we work those negotiations diligently so not by the time barrier to the team more so an outcome set of objectives.
Operator: <unk> for them and they're doing quite well against those expectations and our suppliers are obviously key to us we want to make sure that they are able to.
You know, the first quarter was particularly strong, and as we mentioned, we had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year. That was baked into our guidance, and the timing was such that a lot of that came in in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gates at ten percent. And so while there's no, you know, single one-time item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS.
Operator: Supports the investment in this program that's necessary and so we're taking their interest in wind as well.
Speaker Change: Okay, Great. That's helpful. And then David maybe just on the Aeronautics margins I think you mentioned the strength in <unk> will be a little lighter through the rest of the year, but we're.
Operator: Once you as expected was that and got or did you performed better than you thought you would in the first quarter.
Operator: Yes.
Operator: The first quarter was particularly strong as we mentioned that we had anticipated and opportunity for productivity gains and.
Operator: Indirect rate driven enhancements to the margin as well this year that was baked into our guidance and the timing was such that a lot of that came in in the first quarter, which is why we've noted that.
Thank you both. Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Hey, good morning, guys.
Matthew Carl Akers: We expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gates at 10%.
Thanks for the question. I wanted to ask about Sentinel. You mentioned you're supporting the non-recovery review. Just curious what the outcomes of that could be, and if there's any risk to that program.
Matthew Carl Akers: And so.
Speaker Change: There is no single one time item in the first quarter. It was a particularly strong start and a great way to kick off the year for us.
Operator: Thank you both.
Operator: Thank you.
Matthew Carl Akers: One moment for questions.
Operator: Our next question comes from Matt Akers with Wells Fargo. You May proceed.
Or do you think that's not the case, just given sort of how critical it is? Well, there has been strong bipartisan support for the program, and we expect that to continue. It, of course, is the nation's policy, as reviewed in the Nuclear Posture Review, to have three legs of strategic deterrence. So we do expect that the program will be recertified. But the government needs to take the process seriously.
Matthew Carl Akers: Hey, good morning, guys. Thanks for the question.
Operator: I wanted to ask on Sentinel.
Operator: You mentioned, you're supporting the Nunn Mccurdy reviewed just curious.
Operator: What do you think the outcomes of that could be and if there's any risk to that program or do you think thats not the case, just given sort of how critical it is.
Operator: Well there has been strong bipartisan support for the program. We expect that will continue it of course is the nation's policy as reviewed in the nuclear posture review to have three legs of our strategic insurance. So we do expect that the program will be recertified, but the.
It's a good process, and they're working through the phases of that recertification now. And as I said, we're providing support to them to stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy Act but supporting it fully. Yeah, I got it.
Operator: Government needs to take the process seriously, it's a good process and they're working through the phases of start re certification now and as I said, we're providing support to them and.
Operator: Stay committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn mccurdy, but supporting it fully.
Thanks. And I guess one for Dave, just thoughts on where EAC, at the company level, kind of goes from here. You're still running quite a bit below where you were a couple years ago, sounds like AES has. Unknown Attendee, Scott Deuschle, Northrop Grumman, David Keffer, Cai Rumohr, Scott Deuschle, Sure, I agree with your characterization that there was good progress in the first quarter We had been running substantially above the levels of 2022 and 2023 in previous years before the macroeconomic disruptions.
Speaker Change: Yeah got it thanks, and I guess, one for Dave just thoughts on where EAC.
Speaker Change: Company level kind of go from here you are still running.
Operator: Quite a quite a bit below where you were a couple of years ago. It sounds like <unk> had some good good eac's, but just thoughts on the progress from here.
Scott Deuschle: Sure I agree with your characterization that there was good progress in the first quarter.
Speaker Change: Youll see that further detailed in our 10-Q disclosures as well we had been running substantially above the levels of 2022, and 2023 and prior years before the macroeconomic disruptions.
And so, over time, we anticipate that we will normalize to levels more like our history. And we saw progress toward that in the first quarter, as you mentioned, particularly in AS. But really, across the business, you're seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement and the gradual decline of macroeconomic pressures. So across those three dimensions, we see an opportunity to continue to see margins normalize over the next several years, and Q1 was a good example of what you can anticipate there.
Dave: So over time, we anticipate that we will normalize to levels more like our history and we saw progress towards that in the first quarter as you mentioned, particularly in the us.
Operator: But really across the business you are seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement and the gradual decline of macroeconomic pressures and so across those three dimensions.
Operator: See an opportunity to continue to see margins normalize over the next several years in Q1 was a good example of what you can anticipate there.
Great, thank you. Thank you. One moment for questions. Our next question comes from Jason Gursky with Citi. You may proceed. Good morning, everybody.
Speaker Change: Great. Thank you.
Jason Michael Gursky: Thank you.
Jason Michael Gursky: One moment for questions.
Operator: Our next question comes from Jason Gursky with Citi. You May proceed.
Jason Michael Gursky: Hey, good morning, everybody.
Jason Michael Gursky: Kelly I was wondering if I could ask you.
Kathy, I was wondering if I could ask you to dive a little deep into the space business in two areas, maybe starting with sensors and payloads, and talk a little bit about, you know, the pipeline of business opportunities that you have there, where you're seeing the most interest in the kind of type of sensor, electro-optical communications, you know, SAR, RF, that kind of thing, and just talk a little bit about the So we are seeing interest in modernizing really the entire architecture in space.
Jason Michael Gursky: To dive a little deep on.
Operator: The space business.
Operator: In two areas, maybe starting with sensors and payloads.
Operator: And talk a little bit about pipeline.
Operator: Pipeline of business opportunity that you have there.
Operator: Where youre seeing the most interest kind of like type of sensor letter optical communications.
Operator: R.
Operator: RF that kind of thing can you just talk a little bit about the general.
Operator: Kind of ecosystem and what's going on in the sensors and payload business that you've got there and what you are kind of excited about today.
Speaker Change: Thank you.
Operator: So we are seeing interest in <unk>.
Operator: Modern I've seen really the entire architecture and space and I've been talking about this for a while so whether it's intelligence surveillance reconnaissance communications missile warning and tracking.
And I've been talking about this for a while. So whether it's intelligence, surveillance, reconnaissance, communications, missile warning, and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads, but also in terms of extending the coverage with the broadening of the space architecture.
Operator: The entire space architecture is being upgraded both in terms of advancing the capability of those sensors and payloads, but also the coverage with the broadening of the base architecture and so we are involved selectively in all of those areas as you know we play a key role.
And so we're involved collectively in all of those areas; as you know, we play a key role in ISR communications and varying forms of both missile tracking and missile warning. So really, we feel we have a very broad portfolio that stretches across those areas and doesn't focus on one over the other. And we see them all equally attractive.
Operator: All in ISR communications, and very informed so both missile tracking and missile warning.
Operator: So it really we feel we have a very broad portfolio that stretches across those areas. We don't focus on one over the other and we see them all equally attractive and really in many ways that modernization is well underway and it's what has contributed to the strong growth of our backlog in space over the last few years.
And really, in many ways, that modernization is well underway, and it's what has contributed to the strong growth of our backlog in space over the last few years. Okay, it may be, you know, a similar kind of discussion on the ground systems side of things, um, you know whether or not all of the sensor payloads that we're launching into space are driving the ground system business, which is kind of what the competitive environment is for you there. Yeah, they are.
Operator: Mhm.
Operator: Okay, and maybe similar kind of.
Operator: The discussion on the ground systems side of things.
Operator: Whether that's.
Operator: Oh, the sensor payloads that we're launching up in this space are driving the ground system business I'm, just kind of what the competitive environment looks like for you there.
And we do participate in the ground segment; I'd say our strength is more in the sensors and payloads. But we look at a full integrated solution and are often asked by the government to support them in the ground systems developments that go with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete; we just choose to be a bit more selective there. Again, back to where we're more differentiated.
Speaker Change: Yeah. They are and we do participate in the ground segment I'd say, our strength is more on the sensors and payloads, but we look at a full integrated solution and often are off by the government to support them on the ground systems development that go with that.
Operator: Satellite that we're fielding and so we see that as a marketplace, where we absolutely can compete we just just to be a bit more selective there again back to where we're more differentiated.
Great, thank you. Thank you. Thank you. We just have time for one more question. One moment for our last question, and our last question comes from Peter Arment with Baird. You may proceed. Yeah, hey, good morning, Kathy and Dave. Nice results. Hey, Kathy.
Speaker Change: Great. Thank you.
Peter J. Arment: Thank you.
Peter J. Arment: Thank you.
Peter J. Arment: Just have time for one more question.
Peter J. Arment: One moment for our last question.
Operator: And our last question comes from Peter Arment with Baird You May proceed.
Operator: Yes.
Peter J. Arment: Caffeine, Dave and nice results.
Can you maybe just talk a little bit about what you expect on your CapEx kind of profile when we think about last year you had a big step up, and things are staying elevated here, but you also have just tremendous demand signals both domestically and internationally. Just how you're thinking about, you know, wow, CapEx. You've made enough of the investments. It sounds like you have on the solid rocket side and micro...
Peter J. Arment: Hey, Kevin.
Peter J. Arment: Can you can you maybe just talk a little bit about what you expect on your capex kind of profile and when we think about.
Operator: Last year, you had a big step up and things are staying elevated here, but you also have just tremendous demand signals, both domestically and internationally just how youre thinking about Wow Capex should trend have you made enough investments. It sounds like you have on the solid rocket side in microelectronics, but just thinking about you know more broadly.
Yes, and part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year, being the peak 4% of revenue, and CapEx expenditures, and then starting to see those come down gradually more toward a normalized level in our company. We still see this as a robust growth environment. And so there will be investments that we're making; we're committed to doing that. But we do not see the same demand for those investments over the next several years as we have seen over the last several.
Operator: Yes, and part of why we highlighted today some of those investments that we're making that will support growth over the long term is to reflect the statements that we've made that we do see this year being the peak, 4% of revenue Capex expenditures and then starting to see those come down gradually more toward a normalized.
Operator: Level in our company still see this as a robust growth environment and so there will be investments that we're making we're committed to do that but we do not see the same demand for those investments over the next several years that we've seen over the last that's all.
Very helpful. Thanks. Good. Well, thank you all for joining us on the call today. We, as you see, are off to a strong start to the year. And we will carry that momentum into the following quarters, as our team focuses relentlessly on delivering that technology advantage for our customers and value to our shareholders. So thanks again for joining us. I look forward to speaking with you on our next call in July. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
Speaker Change: Very helpful. Thanks.
Operator: But well thank you all for joining us on the call today, we see are off to a strong start to the year and we will carry that momentum into the following quarters as our team focuses relentlessly on delivering that technology advantage for our customers and value to our <unk>.
Operator: Shareholders. So thanks again for joining us I look forward to speaking with you on our next call in July.
Speaker Change: Thank you ladies and gentlemen, this concludes today's conference call. Thank you for your participation.