Good morning, everybody. If you haven't been here this morning already, welcome back to day two of the Citi Industrials Conference. I have the pleasure this morning of welcoming to the stage Kathy Warden, the CEO of Northrop Grumman. Kathy, I know you wanted to keep your lawyers happy by doing the safe harbor and maybe some initial opening remarks.
Absolutely.
The floor is yours.
Thank you, Jason. It's great to be back with you, and hello, everyone. I am likely to make forward-looking statements this morning, so I'll remind you that those statements come with uncertainties and risks, and I point you to our SEC filings, which you can find on our website for more information about those uncertainties and risks. Now let's talk about some more interesting things, so I really wanted to focus on the fact that over the next couple of weeks in Washington, we expect the administration and the Congress to spend time talking about national security priorities and deciding what the appropriate level of defense spending is on a go-forward basis, and when I look at the stage that is set for those discussions, there are really three things that are consistent with what we have seen in the last several years and in the first Trump administration.
First, we see an environment where the threat is complex, challenging, and elevated. Second, we see an administration that is asking our allies to increase their spending on defense and protection of their sovereign territories and an expectation that the U.S. would do the same, and finally, we see an environment where the peace through strength that America has enjoyed is coming from a well-equipped and supported military and that that needs to endure to have that position in the world. Those three things are common, and we believe set the stage for what the future will look like, so for Northrop, we have been focused on executing a strategy. That strategy is remaining consistent. It has delivered for us 30% growth from 2019 to 2024, and our backlog has reached record levels of over $91 billion. We've done that both in the U.S. and with global partners.
We have a book- to- bill in 2024 of $1.23 and an international book- to- bill of $1.4. So our international sales are growing even faster than our U.S. sales. And as we look forward into 2025, we've provided guidance that suggests that top-line growth will continue. We will expand margins beyond top line in the 7% range at the midpoint, and we will once again deliver double-digit cash flow growth. So we feel very solid in the strategy that our team is executing and how that set of capabilities that we bring to bear is being received globally. Now, I do want to say that in the first quarter, like often is the case, as we look at an administration transition in the U.S., there are some delays in getting things on contract. And so we have projected that our growth will gradually increase throughout the year.
We're looking at about 23% of our revenues coming in the first quarter of this year on track for a 3%-4% growth rate in total in 2024, and then accelerating again as we move into next year. That is very much tied to the idea that this administration will take the next several months to identify national security priorities and work with the Congress to get appropriations completed. Jason, I'll turn it over to you. I'm sure you have a lot of questions on what I just asked or what I just said and some other things as well.
Yeah, why don't we start with the transition? This one, I don't know, feels different than what we've seen in the past, just if for no other reason than they're moving really fast, it seems, right? So maybe talk a little bit about what Northrop is doing differently than you maybe have done in the past with transitions.
Yes. So we really are approaching this one in similar ways, but as you noted, with more speed and agility. This administration is moving quickly, and we see a focus on partnering with the government to identify ways to be more efficient, as well as to operate in a more coordinated way to deliver with speed. And we welcome those ideas and ways of doing business. So that's the formulation of our engagement with the government. That's not different. We have always wanted to partner with the government and look at ways that we can streamline and move faster. It's just being met with much more intensity now from the government to embrace those ideas and look at ways that we can partner to get things done in new ways.
Right. So if you had an opportunity to sit down with the leaders of DOGE, what would be some of the policy prescriptions that you might recommend to them?
Yes. Well, there are a number of things that we believe should be looked at. First is regulatory frameworks that are very lengthy to navigate, need to be reduced and shortened. And that's everything from Federal Acquisition Regulation to export requirements. It's not that we're looking to change the outcome of appropriate governance on those processes, but to be able to move through those processes more quickly to get the decisions that are needed for us to partner and move out. I think the other area that is ripe for review is the appropriate use of different contracting authorities that the government already has and when to use them for what type of work and to make those decisions again with speed and agility.
And then finally, requirements management that we look at how the government can set requirements that drive industry investment and then also allow industry to innovate without being quite so prescriptive on what is delivered. And then also looking in the test apparatus on the back end for accepting those capabilities to be delivered into the field. Again, this isn't compromising quality in any way. It is simply streamlining those processes so that we can embrace innovation, get on contract, and get through the development and delivery cycles faster.
Kind of begs the question, how did we get here? What's your take on that? Like, there was at some point, there was a purpose to all of what you just described.
In running our company, I often tell our team, bureaucracy grows in organizations if you aren't actively weeding it out. And it comes from a place of good intent. You have experiences. Something inevitably doesn't go the way you'd like it to. So you put in place guardrails, processes, or regulations to say, we're not going to do that again. And that over time just becomes the way of doing business. And that's not a bad thing because that learning does need to be brought into organizations. But if you're in a big organization and you let those things sit and then you keep layering on top, you get this massive amount of regulation and process. And then the organization gets more focused on complying with that than thinking about what makes sense.
And so I think it's appropriate to constantly attack bureaucracy and organizations and ask, does this still serve us well? Is this lesson still something that we're learning, or can we move beyond this and give our teams the ability to operate within a looser framework so that they can move with speed? And that is, I believe, a healthy process for our government to go through as well. I think the challenge is that leaders who have oversight responsibility need to feel comfortable that indeed it is time to move away from some of that structure and process that was put in place and take a little bit of risk. And I'm hopeful that that is this time.
Right. You know, one of the I get the sense sometimes just in the conversation that I've had here this week that DOGE and the industrial base might be talking past each other in a way on the definition of what efficiency means because efficiency to date with DOGE is not just cutting. And what I've been hearing from the industrial base is, let's make the whole acquisition process more seamless, time to market will be improved if we can do that. But I'm not hearing about cost cutting from the industrial base to date. So maybe we could just spend a minute talking about you used the word efficiency, and you largely tied it to the acquisition process. So maybe help us understand if you are all more efficient with the acquisition process, does that lead to cost cutting? Does it lead to just capabilities getting on mission sooner?
Maybe just spend a minute just talking about what that means from your perspective.
Right. Well, certainly you hear from Northrop Grumman that we are constantly attacking that bureaucracy within our own company to reduce our overhead costs. And we talked about the reductions we made last year, $200 million alone, just an overhead cost reduction. But I think the real and that is, as you know, where the DOGE is focused. And it's not surprising that they would focus there first. Industry is already doing that, not just the defense industrial base, but every company operates that way naturally. It is a response to competition and staying cost competitive. And the government doesn't have that. So it is sensical that that might be where DOGE starts. But I think what you're hearing from industry is, let's not stop there. The efficiency concept can be applied to the way we work together, which is in the delivery of product for our war fighters.
And that's really where the most value is because it's where the most cost is. If we can actually get through these processes that the government defines and controls faster, then obviously that will take less cost to do so, and that, in my view and estimation, will be significantly more savings to the taxpayer than the reduction of overhead. Not that you would do one, not the other. You do both, but you know, anxious to get to tackling the cost where the costs really reside, and that is in the process of delivering capability.
Right. And speaking of cost at the industrial base itself, so there's a period of time as the Iraq and Afghanistan campaigns were winding down where, from an investor's perspective, it seemed as if the contractors had done a really nice job of getting ahead of some cost cutting in anticipation of, you know, slackening demand on the heels of the conflicts coming to an end. We saw lots of positive EAC adjustments across the industrial base. Was that kind of a one-time thing, or are there, you know, big chunky costs that can be taken out even today?
There are. I think what you see in the industrial base is that when you are in a period of mature production programs, your focus is on driving cost out. And the learning allows you to do that and become more productive lot after lot. And in the time period you're talking about, that's very much the state of play. Many programs were in that more mature phase of their life cycle. Now we have just come off a period of growing budgets, new programs, many programs in that early stage of development and also investing for the future. So that takes cost and investment that you will reap the benefit of later.
I think you have to look at the mix of what is in the defense budget and what is in the portfolio of the company's delivering capability to really understand the difference between that time period and now. I don't believe that the defense industrial base, and certainly I can speak for our own company, is any less focused on reducing and driving cost out of the way we do business. As a matter of fact, I know in our company, we're even more focused on that. We've introduced technology to enable both the development cycle and the manufacturing cycle in our business to be more productive.
We have seen the yields of that, not just in the cycle time to complete tasks, but lowering the amount of rework that we have and redesign because the investments we've made in high fidelity models of the things that we're ultimately going to build are paying dividends. They're reducing our cost in each phase of the system development life cycle. We've called that our digital transformation. We started it in 2020. We are well on our way now. We are reaping the benefits for our customers because the costs are lower on these programs. We have many programs. We talk, you know, most notably about B-21 because it now has moved into production. It's meeting its key performance parameters. It is flying like the model because we made those investments upfront.
Right. Okay, great. Speaking of kind of new products and new approaches to things, it's been interesting to watch over the last eight, 10 years kind of an evolving ecosystem. Defense seems to be cool amongst the venture capital community. I live out in San Francisco. There's a huge push in Silicon Valley. Alex Karp and the guys at Palantir and Peter Thiel at Founders have really, you know, pushed Silicon Valley towards supporting the defense industrial base, and out of that has come, you know, quite a bit of funding and some new startups, some that have had some demonstrated success in getting on contract vehicles. We haven't seen the execution quite yet, so that's still in front of us, but I'd love to get your take on this evolving ecosystem. Kind of what does it mean from a competitive perspective?
Do we have just a bunch of new partners out there to be potentially working with? Just how you're viewing the competitive landscape in this context would be?
Certainly new players coming into the space create both competition and opportunity for teaming. That is how our industry works. I came out of commercial tech. It was pretty much you were a competitor or you didn't work, you didn't work together. It was your competitor if you're in the same spaces. That's not how our industry works. And so we are embracing the idea of partnering with teams that are coming into the industry with new ideas, new technologies, and we are bearing fruit from that. We're working with most of the new entrants in one capacity or another. We also work with the established players in one capacity or another. And we think that that brings better offerings forward to the government, and that's what we seek to do. So competition is good. It keeps us all sharp, and it is something that we don't shy away from.
We are Northrop, very focused on being a technology innovator, and so we often don't just think of ourselves as competing against companies in the U.S. that seek to serve the U.S. government. We think of ourselves as needing to out-innovate the Chinese, the Russian defense industrial base, and so if we have partners coming into work with the government and wanting to bring their ability and know-how, we're going to embrace that so that we can always be offering a technology leadership position to our customers.
One of the things that I found interesting about some of these newer companies is their approach to kind of how the life cycle of their product and vertical integration that they're doing, which seems to contrast oftentimes with the existing industrial base that's a little bit more horizontally integrated, pulling in from suppliers. Just kind of curious, is one model better than the other, vertically integrated versus horizontally integrated? And will we perhaps see some of the legacy companies move in a vertical integrated way?
You know, if it's the horizontal versus vertical, we have had a strategy, and we believe in it, and that it is differentiating for our performance to understand the entirety of the system we're providing. That doesn't mean we don't go to partners to bring in their technology, but we have the engineering depth to understand the system that we're engineering. And when our suppliers may get into challenge, we can send people in to help them. When we are assessing technology, we can assess better whether the technology actually can perform what the company says that it can do. And when we are doing the system engineering, we have the wherewithal to know how the piece parts are going to work together, fit together, and meet the requirements. So if you want to refer to that as vertical integration, you can.
It's not always because it doesn't mean we do every piece of the value chain ourselves, but it is a technical competency across that entire value chain that I do think makes a difference, and Northrop is different than many of our peers in that way, and it is how we compete effectively. Our portfolio is built for that purpose.
Right. Okay, great. Kind of brings me to capital deployment and less about like dividends and buybacks and that kind of thing, and more to how you're thinking strategically about capital deployment from an R&D perspective, an M&A venture to the extent that you have a corporate venture arm. So maybe walk us through, we've got this evolving ecosystem, all these new companies potentially bringing some interesting technology to market. I remember back in the telecom days, you know, a lot of VC-backed companies were started with the aspiration of the exit being selling to Cisco, right?
I'm just kind of curious your view on what M&A might look like in the future, how you're deploying into the venture world, and whether some of these technologies by some of these VC-backed companies end up becoming kind of like your R&D budgets where you're not buying some of these companies up for key technologies?
Whether we would use M&A as a tool relies on so many things. Is it a capability that is different than something we could invest in organically at a lower risk and lower cost? Is it something that is appropriately valued for the discounted cash flows that we're expecting to get from that business? Is acquisition the right approach to get access, or is partnering a better option based on some of those other factors I just mentioned? So we are very active in looking at the landscape and making those determinations of when to use M&A as the tool in the toolbox and when to use partnering.
But at the end of the day, we are going to remain disciplined in thinking about the best use of our capital and what, on a risk-adjusted basis, is the better way for us to bring technology that we feel would be accretive to our portfolio into the business. We also very much believe that there has to be revenue synergy, that we can do something with that business that the current owners can't, and that we can then get that value. If you're just doing it for scale or cost synergy, in our world, those benefits very quickly go back to the government, not to our shareholders.
And so you saw us with the Orbital ATK acquisition really round out our space portfolio, build on our weapons portfolio, but leverage Northrop relationships, customer and mission knowledge, and technology to bundle with what we bought and have one plus one equal three. So that's really what we're looking for when we think about M&A. Otherwise, partnering, or in some cases, we do invest in our partners just to make sure that we are equally putting skin in the game where we are co-developing, but we use that not to be a stepping stone always to M&A. Sometimes it might lead there, but we do that really to strengthen the partnership.
Is there a public example you could give us on that?
Sure. I think you just had Firefly in. We are co-investing with Firefly for the development of a medium launch vehicle. And that's an area where we brought expertise, they brought expertise, and we are combining that in a joint investment model. But it's really focused on new technology innovation and shared interest in pursuing that market together.
Yeah. I'm glad you mentioned that. I was hoping you were going to say that.
Yeah, I thought you were leading the way.
Yeah, I was leading. Yeah, for sure. Yeah. Let's see here. Why don't we do a walk around the world for a minute because there's a lot that has transpired here over the last week or so. I don't want to necessarily say it's the strategic posture of the United States, but at least kind of a sentiment or flavor of where our priorities are seems to be changing here a little bit, so I kind of frame this as Europe, the homeland, and the Indo-Pacific, so why don't we start in Europe where it seems as if, and you mentioned this a little bit in some of your prepared remarks about asking allies to step up, but it seems the message is that, you know, Europe, you're no longer the priority. The INDOPACOM is the priority and our homeland.
So our allies are going to be asked to spend quite a bit more in the future. So I guess there's two questions on Europe. One is, what are the major programs that you are working on today that are supporting the Pentagon, the customer here in the European theater? And then secondly, what are you doing directly for our allies, either through FMS or Direct Commercial Sales that might benefit from higher budgets in Europe?
Because the U.S. has such a close relationship with our allies in Europe, most of what we build and deploy for the US is providing some benefit to Europe, whether in the space architecture with intelligence communications or ground-based assets that we are deploying in Europe in partnership with the UK, or when you think about aircraft, what we are doing to provide intelligence with the aircraft that we have into the European theater, they are getting benefit from those assets. What we are seeing, though, is a desire for European countries to have more control over those assets. And so we have seen unprecedented growth in demand for things like our Triton, unmanned aircraft that supports surveillance of wide areas, particularly in Europe, that is of interest for the Arctic. In the Pacific, it's obviously surveillance of wide areas of the Pacific.
We are seeing increased demand for these products to be bought by our allies rather than just relying on information sharing off these assets from the US government and building out the capacity, which is exactly what the administration wants to see in suggesting that our allies pay their own way, add to, and contribute to the overall capacity. In many cases in Europe, these are not readily available from the defense industrial base in Europe. If they want to deploy something quickly as they are increasing their spend on defense, they are looking to U.S. companies to provide them those assets. I talked about Triton. Integrated air and missile defense is another area where we're seeing significant increase in demand. Tactical missiles is yet another, both ground-based and air-based.
So we expect that will continue across Europe as each of the countries looks now to not only hit 2% of GDP spent on national security, but go beyond that.
The selling model into Europe at this point, is it FMS, Direct Commercial Sales, and the margin profile on either of those contracts? Are they richer than the rest of the mix of your business?
Both are accretive, and that stands to reason. It is normally product that's coming off of a mature product line, and that is where we see the higher margins in the US as well. So this is just a natural effect of what we are selling into the country and that there is not significant development cost left at that point in time. We also have a mix of DCS and Foreign Military Sales. Both are accretive, and what we focus on is that it's the right type for the work that we're being asked to do. So we would rather do Foreign Military Sales if our allied partner is buying into a product line ecosystem because we're continuing to modernize that product line and be part of a Foreign Military Sales structure to do that cost sharing.
It benefits all of the parties that are part of that product line. If it's something more mature, munitions, we'll sell that Direct Commercial. It just makes more sense and has less overhead associated with it.
Right. And I think you mentioned earlier in your remarks that the book-to-bill for your international demand was higher than domestic.
That's right.
Great. So that suggests that growth will accelerate relative to the U.S. on the international markets at some point and should be a positive tailwind for your margins.
That's right. We've talked about double-digit growth expectations for our international business through the remainder of this decade, and we are on a path to accomplish that with the backlog growth that we have seen in the pipeline that we have as we look out into the rest of the decade.
Right, and is most of that demand in one area of the world, or is it pretty well diversified?
It's not only diversified across the globe, it's also diversified across our product lines and our reporting segments.
Right. Okay, great. So let's bring it back to the side of the Atlantic because part of the narrative that's developed here over the last couple of weeks is protecting the homeland, and we've heard, I think, two things, but maybe you've got some others that you could bring up as examples, but protecting the border itself and then Iron Dome, or the two primary things, but if you've got others, let us know. Those are the two. Okay. Talk to us a little bit about what you might be doing today to protect the border, what other kinds of capabilities could you bring to that, and then I think all of us are really trying to figure out what on earth Iron Dome is and what kind of opportunity it might represent for the industrial base.
Yes, so we provide capabilities for surveillance, and that's largely what is applicable at the border, and we don't see that changing for our portfolio other than the demand growing, but in terms of new requirements for capabilities, that's primarily where our orientation is. Iron Dome, on the other hand, represents a new architecture, and so our approach there is to work with the government to understand what requirements there are and how our existing products could fit into that architecture. We don't think this is a large new development effort. It is an integration effort of capabilities that are already existing or under development as we look forward, so a few examples from our portfolio. A key part of missile defense for protection of this country, because these are long-range threats largely, is a space-based architecture for missile warning and missile tracking.
We are developing multiple, actually, capabilities, different abilities to track and sense different types of weapons. We think those fit into the architecture. The ability to integrate all of the data from sensors from space and ground-based sensors is something we do with our integrated air and missile defense suite, which largely is a mature software platform now that takes sensors and shooters, integrates them very quickly, and gives situational awareness to the operator. We think that has application in this scenario. Counter-UAS, because not all threats will be long-range. So that's a capability that we bring. Then, of course, as we look at hypersonic weapons, we are under contract to develop the Glide Phase Interceptor.
So that key capability for the future is part of an Iron Dome architecture, as you think about not where the threat is today, but where it is likely to be into the future. So those are just a few examples. And then, of course, that all focuses on tracking and kinetic interception. There's also non-kinetic intercept capabilities that we work on. Those are largely restricted, so I can't go into much more detail, but we are thinking left of launch as well.
So a lot of existing capabilities. Do you think that what you just described, this integration of a lot of these capabilities that either exist today or are in development, necessarily lead to higher budgets for this area, or is this stuff that's already kind of in flight, and it's just a question of better coordinating to make sure that we're going to deploy these assets in a way that's specifically protecting the homeland?
I think more the latter. It will be the path that delivers capability more affordably and quickly, and I also see this as more a capacity question because the capabilities that are under development have a certain planned program of record that did not include the mission of protecting the homeland, and often when we think about growth vectors for our products, there's the add capability, make the product more capable, but there's also add mission, add ways that this technology can be helpful, and that could be new geographies in coverage. It could be, in this case, really reflecting on a homeland defense mission when that wasn't the primary purpose of the program of record, but you can't do that with the same number of assets. You have to have more assets to be able to do that.
So I think largely it will be growth of units on existing programs versus whole cloth new efforts that need to be started.
Right. But more budget dollars being spent.
It has to be more budget dollars because it's a mission that has been unfunded or underfunded until this point.
Or not even defined as being a mission in its own right. Okay, that makes sense. Maybe we can move over closer to home for me and the Pacific and talk a little bit about the company's current programs and where there might be some potential growth factors as we, I don't know, more wholesomely pivot towards the Pacific because I feel like we've been doing that now for a while, but maybe just describe the company's efforts in that region of the world.
Yeah. Well, this is where our company's portfolio really is at the center of effective deterrence and effective capability to engage if and when needed. When you think about our ability to surveil, whether that's from space, from air, or to pull all of that information together into a situational awareness picture, that is a strength of our company. When you think about being able to engage at long range, we have weapons that are focused on that long-range mission and the propulsion systems that enable that. When you think about being able to penetrate enemy air defenses, stealth is a core competency of ours, and of course, that is the primary mission of the B-21, and not just as part of the nuclear deterrent.
That aircraft has the ability to penetrate for more conventional missions and to be a quarterback of other assets that don't have the same characteristics that it has, and I think that's really the interest that has formed around ramping the B-21 faster and buying more of them is thinking about what the Trump administration in the first instantiation and now has seen is the ability for this to be a multi-mission aircraft, so whether you look at the portfolio through the lens of existing capability or just the technologies, the core technology needed to compete in that environment, our company is very well positioned.
Okay, great. I've got two remaining questions. The first is a standard one that we're asking all companies here at the conference across all sectors. We're just doing a general survey trying to see whether there might be some overlap across the industrial base, not just defense industrial base. So are there two or three innovations or structural changes that are affecting the company, that will affect the company over the next five years, or emerging trends that you think are perhaps overlooked by investors at this point?
The first that I would point out is what I've mentioned several times. I've talked about technology leadership being at the core of our strategy, that we really are a technology innovator. That is how we bring value to our customers. Yes, it is in the defense arena, but we don't develop capability that isn't leading-edge technology that can help our customers have an advantage. And so the rate of change in the technology landscape is certainly something today that is different than it was a decade ago and will be different 10 years from now than it is today. And so we have really focused our company on being able to continue to innovate. And in many cases, out-innovating ourselves, like good technology companies do.
We are replacing our own best thinking on much shorter increments now because penetrating aircraft today need to have far more capability than they did two decades ago when we were working on the last microelectronics today. We won an award in California for the most innovative product. We hold the Guinness World Records for the fastest microprocessor. This is advancement beyond what tech companies have done. It is for the purpose of our military. But the reality is we've been in that business for 50 years. That's the legacy we're building on, but we are constantly out-innovating ourselves, and we have to keep doing that because it is the core, the differentiation that we have not only in this industry, but that our customers have against their competitors, which, as I said, is largely defense industrial base in other countries, not just relying on U.S. technology.
So we are very focused on keeping up with technology innovation trends. I'd say the other thing is that the world continues to become more intertwined and more complex. So it used to be that national security was thought of in a stovepipe. Economic security was thought of separately. And now those things are highly intertwined. And foreign policy, along with defense policy and economic policy, really need to be thought of in concert and all tools in a toolkit for our nation to provide the stable infrastructure that not just our industry, but every industry relies on. And I think it's why you see so much interest, not only in new entrants, but new investors focused on this space because of that reality. But you can't have economic security. You can't have stable business conditions without national security as well.
Okay, great. In the one minute that we have remaining, I want to provide you the opportunity to what I describe as kind of drop the mic kind of and walk off the stage moment here. Maybe talk about the next 10 years, what the company is doing today to make sure that you have equal or greater share of your customer's wallet over the next 10 years, and why you are really excited about the opportunity here for the company and why investors ought to be really excited.
Yeah. Because we are the leading technology innovator in the space in which we choose to operate. We know who we are. We're very focused in that mission. We don't limit ourselves to just our own ideas and our own technology. We are partnering across the broader ecosystem to bring that advantage to our customers. We're disciplined in the way that we take on that work and execute that work to deliver for our customers. And we are predictable in delivering the outcomes to our shareholders that we commit. We give long-range targets, and we just consistently go out and knock those down and deliver upon them. And so that is who we have become known to be. It's easy to say. It's hard to execute. And yet that is what our team is focused on doing each and every day.
As I sit here, I feel very proud of the growth that we've been able to deliver, the shareholder value that we've created in the time that I've been in this role. We see great optimism to continue that going forward with the ability to win new programs, and we have taken share. We expect to continue to do that based on the backlog and the pipeline that we have today. It doesn't matter in terms of what our government needs as much as it matters that we're able to respond to that and solve their hardest problems. That's what we've demonstrated an ability to repeatedly do.
Perfect. With that, I think we'll wrap it up. I appreciate your time.
Thank you.