Northrop Grumman Corporation (NOC) Morgan Stanley's 12th Annual Laguna Conference (Transcript)

Northrop Grumman Corporation Conference Call Summary Company Overview - Company: Northrop Grumman Corporation (NYSE:NOC) - Date: September 12, 2024 - Participants: Kathy Warden (President & CEO), Kristine Liwag (Morgan Stanley Analyst) Key Points Financial Performance - Northrop Grumman has achieved high single-digit growth in the first half of the year and projects a 5% growth at the midpoint for the year [3][3] - The company has maintained a 5% annual growth rate since 2019 [3][3] - Backlog has increased to $83 billion, representing a 30$2.5 billion in shares this year [3][3] Investment Strategy - The company aims to normalize capital expenditures while continuing to invest in growth opportunities both domestically and internationally [4][4] Defense Budget Environment - Anticipation of a continuing resolution for the Fiscal Year 2025 defense budget, with bipartisan support expected for defense spending above the President's budget requests [5][6] - Upward pressure on defense budgets is driven by the threat environment and inflation impacting real expenditure requirements [7][7] International Opportunities - International sales have historically been in the 12% to 15% margin range, with a focus on expanding the international portfolio [9][9] - Key international programs include air and missile defense systems and tactical weapons like the AARGM-ER [10][10] Portfolio Resilience - 75% of Northrop Grumman's portfolio supports prioritized missions beyond the B-21, Sentinel, and F-35 programs, indicating a diverse and resilient business model [12][12] - The company has a strong microelectronics capability, producing advanced microchips for national security applications [13][13] B-21 Program Insights - The B-21 program consists of development, low-rate initial production, and full-rate production phases, with expectations for profitability in future production lots [19][19] - The program is viewed as a model by the government, with strong performance anticipated to continue [18][18] Next Generation Programs - Northrop Grumman is not bidding as a prime for the Air Force's Next Generation Air Dominance program but is engaged as a supplier [21][21] - The Navy's next-generation program is still moving forward, with Northrop Grumman being one of three bidders [23][23] Sentinel Program Update - The Sentinel program is undergoing restructuring due to a Nunn-McCurdy breach related to cost estimate updates, but the company continues to execute on the program [26][26][28][28] Defense Systems Growth - The defense systems segment is expected to be one of the fastest-growing segments in 2025, driven by Sentinel and increased demand for missiles and munitions [30][30] Space Segment Performance - The space segment is expected to return to growth in 2026, with underlying business growth despite recent challenges [34][34] Margin Expansion Opportunities - All segments have potential for margin expansion, with defense systems and mission systems expected to contribute significantly in the near term [36][36] Mission Systems Challenges - Mission systems have faced margin pressures due to supply chain disruptions and a shift towards lower-margin development work, but improvements are expected as programs transition to fixed-price contracts [40][40][42][42] Free Cash Flow and Capital Deployment - The company aims for greater than 15% compound annual growth in free cash flow, driven by top-line growth, margin expansion, and normalizing capital investments [43][43] - Capital deployment priorities include investing in growth opportunities, maintaining a competitive dividend, and share repurchases [48][48][49][49] Strategic Focus - The company emphasizes the importance of technology advancement and mission impact, aiming to support global security and strengthen allies [51][51][53][53] Conclusion - Northrop Grumman is positioned for sustainable growth with a strong backlog, diverse portfolio, and strategic focus on both domestic and international opportunities, while navigating challenges in the defense budget environment and supply chain disruptions.