Thanks, Josh. And good morning and welcome to Northrop Grumman second quarter 2023 conference call. We will refer to a PowerPoint presentation that is posted to the IR website on the call this morning.

Before we get started, matters discussed on today's call, including guidance and outlooks for 2023 and beyond reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of Federal Securities Laws.

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

And on today's call are Kathy Warden, our Chair, CEO and President and David Keffer, our CFO.

At this time, I'd like to turn the call over to Kathy, Kathy?.

Thanks, Todd. Good morning, everyone. And thank you for joining us. As you saw from this morning's earnings release, global demand for Northrop Grumman solutions is driving exceptional growth. In the second quarter, our sales were up 9% with solid contributions from each of our four business segments.

Our ability to hire and retain talent and improving supplier deliveries are strengthening our top line. Even our year-to-date sales increase of 7% and an improved outlook. We're increasing our full year's sales guidance range by 400 million. In addition, award volume in the quarter was robust, with a book-to-bill ratio of 1.14.

As a result, we're increasing our full year book-to-bill projection to approximately 1.0. Our $79 billion backlog continues to be more than two times our expected 2023 sales supporting our long term growth outlook. We delivered solid second quarter earnings per share of $5.34. And we're increasing the lower end of our full year guidance range by $0.20.

And free cash flow was healthy in the quarter more than a billion dollar higher than Q2 of last year, positioning us well for our full year target. Turning to the budget environment and starting with the U.S. We're encouraged by the continued bipartisan support for national security funding to implement the administration's national defense strategy.

The FY ‘24 budget and recent congressional committee bill prioritize modernization including areas of strength in our portfolio, such as the triad, the space domain, information superiority, and advanced weapons. We also anticipate continued support for Ukraine and related emergency spending, which would represent even further increased demand.

Global demand for our products also continues to grow as our allies increase defense spending to address evolving threats. We are well positioned in multiple markets to meet this demand with programs such as [Argonne] IBCS and E2-D as well as munitions. With a robust backlog and leading growth outlook.

I'd like to now spend a few minutes outlining our path to margin expansion, which is a key element of our earnings and cash flow growth plan. Our 2023 operating margin dollar guidance is in the range we've previously provided. This guidance implies a segment margin rate in the mid 11% range in the second half of 2023.

Having delivered a rate of 10.9% in the first half. We also see an opportunity to increase our year-over-year margin rate in 2024, and get to a 12% target in the longer term. Achieving this margin improvement is built on three key drivers.

First, is the stabilization of temporal macro economic factors that have driven higher cost and impacted our supply chain and labor efficiency. Second, is the ongoing implementation of cost management programs across the company that helps drive affordability, competitiveness, and performance.

And third is our business mix, which we see shifting to more international and production contracts. As international demand grows, and many of our current development programs mature over the next several years.

With regard to the macro economic factors, supply chain disruptions rooted in the pandemic, and the subsequent labor market tightness, have created programs delays and cost growth.

To reduce this disruption, we're buying ahead of schedule pursuing second sources where it makes sense and placing more of our people at suppliers to facilitate timely material delivery. We see signs of progress across our supply chain from these actions. And we are seeing fewer new issues emerge.

We've had exceptional performance in growing our headcount since the second half of 2022, and attrition rates are down to pre pandemic levels. Our focus now is on optimizing labor efficiency, which is an important driver of profitability. To accelerate the learning curve for our employees.

We're leaning forward with innovative training programs and standardizing work instructions. Inflation has been a challenge for industry as well as others, cost growth has now begun to moderate. But the last 18 months of inflation continue to have a higher base effect on our costs, especially in labor.

If you look at our year end 2021 fixed price backlog, it was largely priced before we began to experience elevated levels of inflation. However, of that backlog, approximately 70% will have been converted into sales by the end of this year. And for new bids, we are factoring higher inflation expectations into our contracts.

We're also working to drive additional discipline in our bid approaches, particularly on fixed price contracts to help protect against these types of dynamics in the future. Overall, we anticipate that these macro economic impacts have stabilized and now have largely been incorporated into our margins risk factors.

The second key driver of margin opportunity is cost management, which benefits both affordability and competitiveness. We are laser focused on overhead cost reduction. A foundational element of these reductions is our implementation of digital solutions across our business, which will help to drive performance and productivity.

For example, we've built a digital ecosystem that focuses on program execution, bringing together employees, customers and partners into an integrated environment, so they can seamlessly work together. This accelerates design, integration, testing and deployment across programs helping us to deliver with quality, speed and efficiency.

We're increasing the number of programs that are operating in this ecosystem. And today, we have over 100 active programs that are doing so, we're also investing in and advancing the technologies and digital systems in our factories. We're scaling this across the enterprise to drive efficiencies that should benefit all of our stakeholders.

For example, on the B-21 we've successfully demonstrated the use of this digital thread high to advanced manufacturing technology to realize over 15% labor efficiencies in one area of the build. And in June, we launched the expansion of this approach across the whole build process.

We're extending this digital thread into our business operation to deliver further benefits across the company. This includes how we're managing our supply chain, where we've broadly centralized procurement, and we're working to leverage our purchasing power to reduce costs.

We have over 20,000 suppliers and we've begun securely connecting them into our digital ecosystem. Over the next several years, we expect to have the majority of our supply base fully integrated, this is expected to lower supplier costs and significantly improve productivity. The third key area of margin opportunity is our business mix.

For several years we've had one of the highest cost plus development contract mixes in the industry reflecting our significant early stage position on key franchise programs, which will transition to production throughout this decade. This cost plus mix has been increasing with our first house revenue at 55% Cost Plus up from about 50:50 last year.

Looking forward, we see this shifting towards more fixed price revenue, rising to approximately 60% of sales by 2027. As a number of large programs in all four of our sectors transition to production. Production program margins are typically a few points higher than development margin.

So mix shift can contribute meaningfully to our segment operating margin rates. And we're making good progress on moving programs through development and into production. For example [Argonne ER] completed its fifth consecutive test flight in the second quarter.

This program is nearing completion of its development phase, and is on track to ramp production volumes next year. And on B-21, we successfully powered on the first flight test aircraft in the quarter another important milestone in our campaign to achieve first flight in transition to production.

We also expect our international business to grow at a double digit rate over the next few years, improving our margin opportunity as global sales become a larger percentage of our mix.

In the second quarter, we demonstrated our IBCS solution for eight potential international customers, reflecting growing demand for this advanced air and missile defense capability. We also signed a memorandum of agreement with Rheinmetall to expand capacity for F-35 center fuselage production in Europe.

We expect these three drivers to result in improved affordability, even better performance and higher margins. When combined with the strength of our backlog and increasing global demand. These operating margin improvements should provide the foundation for strong future free cash flow growth.

Now with respect to capital deployment, we're executing a strategy that prioritizes investments to support our business plan and returns cash to shareholders. In May we increased our dividend for the 20th consecutive year by 8%.

Year-to-date, we have returned $1.5 billion to shareholders and are on track to meet our goal of returning more than 100% of free cash flow this year. Overall, the global defense budget outlook and our alignment with customer priorities give us confidence in our growth trajectory.

We are focused on margin expansion opportunities and converting this to free cash flow growth to deliver value both for our customers and our shareholders. So with that, I'll hand it over to Dave and he'll cover details of the second quarter financial results and updates to our full year outlook..

Thanks, Kathy. And good morning, everyone. We're pleased to report another solid quarter, we remain focused on executing our strategy and believe we're well positioned to grow our topline earnings and cash flows for years to come.

The demand environment continues to be robust, supported by the alignment of our portfolio with our customers highest priority missions. And those Kathy described, we see a path to expand margins in the second half of this year and beyond. As macro pressures ease and we drive efficiencies into our business as it grows and experiences mixed tailwinds.

Now turning to Q2 results, we generated $10.9 billion of new awards, a higher total than we previously expected, our book-to-bill was 1.14 and was driven by restricted awards of $5.4 billion. This brings our year-to-date total to $8.6 billion in restricted bookings.

Looking forward, we expect a number of production awards in the second half of the year, including the first lot of B-21 LRIP. Moving to sales on Slide 4 in our earnings deck, we’ve delivered strong topline growth of 9% in the second quarter.

Building on the momentum from Q1 as a result of our success in bringing on new employees, incremental improvements in the supply chain and continued backlog strength our sales are growing at a higher rate, and we've increased our full year guidance. With respect to segment results all four of our businesses grew in the second quarter.

Space continues to lead the way with their second consecutive quarter of 17% sales growth as GBSD, NGI and restricted space programs continue to ramp. In defense system sales increased 10% on the strength of their armaments and Missile Defense franchises.

Mission Systems growth of 5% was driven by restricted programs in the networked information solutions business and aeronautics systems returned to growth as higher volume on restricted programs outpaced the headwinds on legacy programs as we've anticipated. Turning to Slide 5, segment margins in the second quarter were 11%.

Keep in mind that Q2 of last year included over $70 million or 80 basis points of benefit from a land sale and a contract related legal matter. Most importantly, margin dollars improved incrementally from Q1, largely meeting our expectations.

Program performance remains strong across the portfolio, as the team does a good job in navigating the lingering disruption from the pandemic and macro economic factors we've been discussing.

One area of pressure we experienced in the quarter was a $36 million unfavorable adjustment on NASA's habitation and logistics outposts program or HALO in our space system sector. Moving to earnings per share on Slide 6, diluted EPs in the second quarter were $5.34.

This included lower net pension income of roughly $1 per share partially offset by more favorable returns on marketable securities than in the same period last year. Slide 7 highlights the non operational pension headwinds we experienced in Q2 on a year-over-year basis 2023 pension income will be lower for all periods when compared to 2022.

But these headwinds are expected to dissipate as we look to 2024. With respect to cash, we generated strong free cash flow in the second quarter of over $600 million, a significant increase compared to the same period last year in which we had an outflow of $460 million.

This improvement was driven by increased billings and timing of collections across the company. We paid roughly $360 million of cash taxes associated with section 174. And we continue to expect a full year impact of a little over $700 million. Moving to 2023 guidance.

We'll start with a few updates to our sector estimates which you can see on Slide 8, our space business continues to deliver outstanding sales growth and bookings, demonstrating the strength of its diverse portfolio capabilities. As a result, we're increasing sales guidance for space to the high $13 billion range.

Remember, as recently as 2019, this business was generating revenue in the mid $7 billion range. So our guidance this year reflects a Fantastic Four year CAGR of roughly 17%.

At defense systems based on the strength of their year to their year-to-date results, we're increasing our full year expectations for this business to the mid to high $5 billion range. This represents growth in the low single digit range. There are no changes to our revenue expectations at [AS or MS]. With respect to margin rates.

We're maintaining our expectations for as AS, DS and MS and we're projecting a lower operating margin rate at space to reflect the rapid increase in new program winds and their first half results.

At the company level, this translates to an increase to our sales guidance of $400 million in a growth rate between 4% and 6% for the full year, we're maintaining our expectations for segment operating income dollars, we expect a slightly higher full year tax rate of 17% and we reduced our projection for shares outstanding to the mid $152 millions to reflect our latest share repurchase expectations.

Our EPS outlook continues to assume Q3 Closer of the sale of the minority investment for which we increased our full year EPS guidance by $0.40 last quarter. This quarter, we're increasing the lower end of our guidance range by $0.20.

We remain on track with our full year outlook for cash and continue to expect to grow our free cash flow to about $3 billion by 2025. This represents a greater than 20% CAGR driven by the growth of our business and structural tailwinds from cash taxes, lower CapEx and higher CAS recoveries.

In over the next five years, we see an opportunity to approximately double our current level of free cash flow. Lastly, we continue to execute our balanced capital deployment plan.

This includes investments of over $2.8 billion in R&D and CAPEX this year and returning excess capital to shareholders via our quarterly dividend and share repurchase plans. For the year, we continue to expect to return over 100% of our free cash flow to shareholders, including roughly $1.5 billion in share repurchases.

We also plan to retire $1 billion of notes that mature in August, and we don't have any additional bond maturities until 2025. Overall, the Northrop Grumman team delivered a strong first half of the year, our business strategy is working and we're continuing to drive additional growth in sales earnings in cash.

With growing global demand for a portfolio of solutions and solid program performance. We're building long term value for all our stakeholders. With that, let's open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from Robert Stallard with Vertical Research you may proceed..

Thank you so much. Good morning..

Good morning..

A couple of questions from me. First of all, Kathy, thanks for your commentary on the margin expectations for the next few years.

But I was wondering, as you talk about this, what are you expecting on the B-21 LRIP? Is that still anticipated to be around a sort of breakeven margin in your expectation? And then secondly, does the end of the F-18 have an impact on this?.

Rob, thanks for the questions. So as we look at the profile going forward for B-21 as we've noted before, we are not planning to have margin from the LRIP contracts. So when I talk about our Merchant projections going forward and anticipate that I will remind you we still have the risk factor associated with B-21 as we look at inflationary impact.

In the quarter, we did receive notification that the DOD has allocated $60 million for B-21 LRIP procurement due to inflationary impact and we expect that to be awarded later this year.

But keep in mind, this only applies to the one fiscal year it's associated with FY ’23 and we continue to work closely with the government on an effort to address the impacts of macroeconomic disruptions. With regard to your question about F-18. Yes, our projections also incorporate the wind down of the F-18 production line.

We have been anticipating that it is built into our plans if we think about our production profile over time, that mix is being driven not just with aerospace programs like B-21, transitioning to production and F-35 continuing to grow. It is built on our entire portfolio.

All four of our segments will see programs shifting from development to production in that timeframe and that mix shifting. Okay, then just a quick follow up on the HALO program. Could you clarify if this is a fixed price development program or if it doesn't, has a different contractual structure? Thank you..

It is a fixed price program. We had worked with the government in a cost plus structure through the preliminary design review. So we had a more mature design before transitioning into a fixed price contract structure.

And as I noted in my comments, we’re being even more disciplined moving forward in ensuring that we work with the government to have the appropriate use of fixed price contracts. We think that is best applied for commercial items or production programs with stable requirements in mature design is it's turning out on the HALO program.

The requirements are not as stable as we or the government anticipated. And we're working with them to address that change management as we go forward..

Thank you, one moment for questions. Our next question comes from Richard Safran with Seaport Global Partners. You may proceed..

Kathy, David, Todd, good morning.

How are you?.

Good morning..

So, you've been a bit reluctant to talk about this so far, but I thought I'd see if you'd comment on the NGAD Sixth-Generation Fighter Program since the Air Force just recently announced the competition.

What I'd like to know is if you're thinking about bidding this as a prime, and I'd also like to know if you could, if this program is considered part of your, your growth strategy, so any color you could provide that would be helpful. Thanks..

Thanks, Rich. Yes, before the government officially announced the program and they're intend to issue the RFP we had been quiet. But we have notified the U.S. Air Force that we're not planning to the NGAD RFP as a prime. We are responding to other bidders request for proposal as a supplier that's particularly in our mission systems portfolio.

And as I noted in my remarks, we are remaining disciplined in assessing the right programs to pursue. And that's ones where we feel we're well positioned with a mature offering. And with the business deal reflects an appropriate balance of risk and reward for both the customer and the industrial base.

So the [novice] decision on this program doesn't impact our path to sales and earnings growth at [NGAD] we have a strong backlog in that sector and we have other opportunities and military aircraft that we are pursuing..

Okay, thank you..

Thank you..

Thank you one moment for questions. Our next question comes from Ron Epstein with Bank of America Merrill Lynch. You may proceed..

Yes. Hey, good morning, everybody.

I guess I have to dig down a little bit further on that with that no bid, also crossover to FAXX? Or do you -- at a related program or a different program? How should we think about that? Or is that when you want to be a supplier on as well?.

Well, I'll just say that, when I noted we have other opportunities we are pursuing. I won't disclose at this point exactly what those are a little more information comes out on other programs.

But you could assume that if we feel we're well positioned, and the government is appropriately balancing risk and reward as I said that that would be a program we would pursue..

Got it? Got it. Got it. Got it. Okay, cool. Thank you..

Thank you. One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley, you may proceed..

Hey, good morning, guys. And maybe following back up on those two questions, I mean, not bidding as a [prime] and NGAD. Kathy, is this part of your strategy in terms of maintaining, margin growth in the next few years? Because, we look at historically you guys had walked away from T-7, you'd walk away from the [tanker], and avoided the Winner's Curse.

Is that how to think about the strategy for this program? Or are there other factors in play that we should consider?.

Oh, Kristine, certainly your words, not mine. But we do feel that discipline has served us well in the past and selecting how much risk to take and what to pursue. And we've learned lessons from some of our own experience as well. So we are applying those as we think about what to bid and what not to bid going forward.

And that is critical to us, expanding our margins back to what investors expect of this company. And it's the three factors I mentioned. But the discipline, and ensuring we have the right combination of risk reward is important.

And it's not just important for us to be able to meet our commitments to investors, but for the entire industrial base to remain healthy, so that we can have industrial base that investors want to invest in..

Great, thank you. I'll keep it to one..

Thanks, Kristine..

Thank you, one moment for questions. Our next question comes from Doug Harned with Bernstein. You may proceed..

Good morning. Thank you. On the margin question, even when we look at history, generally inflation, it doesn't affect defense companies that much. And we've obviously seen a very difficult two years where it rose, and you've talked about this rose very quickly, and you've had to absorb costs and fixed price contracts. When you look forward.

You talked about being able to run out some of the contracts that were priced before we had that higher inflation level.

But when you look at repricing contracts that go into next tranches, new work, do you expect that you're going to be able to get back to be able to price off a base cost level that could allow you to have the same kind of performance we saw in the sense in the pre COVID era?.

Yes, Doug, we do expect that to be the case, the government will look at the actual that we have experienced and the inflationary pressures are absolutely showing up not only in labor but material which then provide us the basis to work with the government and negotiate half of those hire, half in the future contract..

And then, clearly and it sounds like you're looking at this so over the next 12 months or so you see this shift but clearly it also requires more money in the budget. We saw a lot of money come in in '23 budget from the senate last year.

But you're expecting then in the budget to also be able to cover these higher costs?.

I expect that the budget will need to incorporate these higher costs to the extent that inflation exceeds the growth of the overall budget, they could of course be supplemental or priority. Will be made in terms of what the government will buy.

We've already seen for the government happening to reduce quantities on program from their anticipated level which you address the higher cost coming in based on the inflation and we expect that to continue for the foreseeable future as the contracts come up for renewal..

Thank you. One moment for question. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed..

Good morning, guys. Thank you. I want to ask about space specifically fees. Your revised guidance takes into account $1.6 billion of sales growth in 2023.

Can you maybe bucket this growth for us and where is it coming from, how much of it is GBSD and how do we think about the margin implications of this growth given the quarter?.

GBSD and MGI. We have talked about that been approximately half of the growth and the other half coming from a broad set of programs but most notably our national security portfolio which is about 80% of our overall revenue in the space business.

And the margin profile is similar across those businesses with early space development being lower margin as we shift into production there like we talked about earlier on the call will present the opportunity for space margins to continue to expand. But we're really pleased with the 9% that we're seeing there.

Obviously we work to get that closer to 10% through the work that we're doing, there is some performance. And in the longer-term is mix as seen and have the part potential to go even higher.

But when you look at 9% for a business, that is the door, that type of growth and been able to continue to manage through the disruption of the macroeconomic environment. We feel like we're in a good place..

Thank you..

Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed..

Hey, good morning. Yes, thanks for the question.

I want to ask about and I think there was a GAO reporter in the quarter that customer maybe some schedule rips on that program, I think it's cost-plus any have been, just your thoughts on how that programs going, is there maybe any riskier than that?.

Yes, thanks for the question. So, this is in regards to Sentinel or GBSD as many of you know it. And there was a GAO report that's focused schedule pressure. We've been talking about that and the U.S. Airforce has as well as we have seen disruption in supply that has flowed through to schedule pressure on the program.

We're in the process of working with the Airforce on looking to optimize the schedule to see what we can pull outward obviously it's shifting right and how we can maintain the initial operating capability day which is the primary focus of the government, so that we cannot place those missiles in silos as anticipated later in the decade..

Okay, thanks. And then, if I could follow-up. I guess maybe on working capital.

Dave, I don’t know if you could comment on your thoughts on how that progresses in the second half?.

Sure, thanks Matt. We continue to feel really good about our working capital status as efficient I think as any across the industry and particularly strong in the second quarter.

We mentioned a $1 billion of improvement year-over-year in free cash flow that was bolstered by the strength of our invoicing and collections efforts during the quarter which puts us in good status. We think about where we stand year-to-date compared to a year ago.

We continue to expect a kind of typical seasonal pattern with the strongest free cash flow and therefore working capital efficiency in the fourth quarter of the year. But overall feel good about our working capital efforts..

Thank you. One moment for questions. Our next question comes from Peter Arment with Baird. You may proceed..

Yes, thanks. Good morning, Kathy, Dave, Todd. Hey Kathy, thanks for your comment on the mix and kind of the longer-term outlook on where that transitions from cost plus to kind of fixed price mix for the company. Is 2023 kind of the peak year or is it more like next year for cost plus and just a related to kind of just your comments on working capital.

How do we think about the working capital profile kind of over that similar period? Is that like a that does have become a headwind or is it an opportunity for you. Thanks..

Thank you, Peter. I'll start with your mix question. Yes, this is the year to think of as the higher water mark for cost type work given where we are in the development cycle particularly on many of our largest programs. We mentioned we've been in the 55% of sales range in terms of the cost plus mix in the first half of the year.

We expect that to ease slightly in the second half, well it's really over the next four five years we'll see that shift back to the other side of 50/50 and toward that 60/40 fixed price mix that we described in our prepared remarks.

So, that is a meaningful opportunity for us in terms of margin expansion as we help deliver those capabilities to our customers in the production phases of the programs.

Working capital longer-term, as I mentioned, we're really pleased with our working capital efficiency when we think about where we finish 2022, where we project 2023 finishing as well.

And so, we don’t think of working capital as a source of a lot of upside opportunity for additional efficiency over the next five years nor do we think of it as an area of expected headwind. I think it'll be more neutral than that.

So, when you think what will drive that opportunity to double our current run rate of free cash flow over the next five years, think of it in terms of growth in the sales volume of the business, the margin rate opportunity we've been talking about and the conversion of those margin dollars to cash flow that certainly the number one effort and the number one driver.

But then, coinciding with that you'll see a decline in demand for capital expenditures where peak levels in '23 and '24 around capital intensity, that will ease to a more historical levels over the next five years.

You'll see some increase in CAS funding over the next couple of years in our in the projections we've outlined over the last few quarters. And then cash taxes will decline based on current tax law particularly related to the amortization requirements for R&D..

Thank you. One moment for question. Our next question comes from George Shapiro with Shapiro Research. You may proceed..

Yes, hello. On the options for the B-21, I mean you still got the same commentary in the queue. I think that you've been expecting the first option to get called in the third quarter. Is that the time yet that we'd expect to see some real update on what the losses might be.

And if that will you sit there and provide a number for that one option and then subsequently rate fill other options are exercised and what you're thinking as to how you will handle that. Thanks..

Hey George, it's Dave. So, as we talked about on the call, the first flight at aircraft was successfully powered on in Q2. We remain on track for first flight this year. Again, that timing continues to depend on events and data of course over time. And we anticipate that that first LRIP contract will be awarded following first flight.

We will continue to evaluate the performance in the outlook for B-21 LRIP as well as the EMD portion of the program on a quarterly basis and provide updates as we have them. Of course, those will be informed by continued progress in driving efficiencies on the program as well as our understanding of that first LRIP contract lot and beyond.

So, we'll take all of that into account each quarter as we update our thinking..

Thank you. One moment for questions..

Go ahead, well you can give us a follow-up..

We can take that one follow-up if you don’t mind..

Oh, no problem. [Audio Gap] -- 9% or so. So, about half what you experienced in the first step.

Can you provide reasons for that slowing?.

Sure. A few things I'd point out there. Obviously the growth rate for the year for space is increased with its guidance update to the low double-digits now and we're really pleased with that. The first half of the year has been close to that 17% range.

Some of what you see there is just a matter of the year-over-year compares where the first two quarters of the year were a bit lighter compared than Q4 in particular. And that’s frankly the case across the business.

We had a tremendous Q4 for sales volume in 2022, so we anticipate that the touch compare will lead to a lighter year-over-year growth rate in the second half of the year across all four of our segments as we get to Q4. But overall the sequential growth is where we'll continue to look for from space and other sectors.

When you look across the company, you've got about 51% of our sales guidance in the second half, 49% in the first half. So, you see the demonstration of continued sequential growth and the year-over-year growth rates are more of a matter of those compares..

Okay. Thanks very much, Dave..

Thank you. One moment for questions. Our next question comes from Seth Seifman with JPMorgan. You may proceed..

Hey, thanks very much. Good morning. I wanted to ask first about space and it seems like definitely I appreciate the detailed commentary on the overall margin outlook.

It seems like space has been the business where a lot of that margin pressure has been felt most not just maybe from foreseeable things like mix but from surprises that have caused the company to go down the margin there.

What is it about the portfolio in space that's driving that now? And how do you assess the risk from here, is space still the sector where there is maybe the most margin risk due to continued work on fixed price development programs like HALO and maybe exposure to either the SDA Tranches which I think are also kind of fixed price development work.

How do you see that now?.

So, overall the space business is performing very well. We certainly have pockets on certain programs that we are focused on continuing to improve the disciple around tower managing those efforts along with the customer. And so, I don’t see space as majorly different than any other segments of our business in terms of risk profile aside from mix.

Certainly there is more risk in development programs and that's why we generally have where our margin rate coming out of development. But as space has transitioned programs to later stage developments in production, their performance has out solid the rest of the business and we expect that to continue..

Great. And maybe just as a quick follow-up in AI. Perhaps feudal attempt to bring out a little bit more information about the NGAD strategy. I believe the collaborative combat aircraft portion of NGAD is a separate solicitation.

Are you planning to pursue that?.

It is a separate solicitation and we're looking at it closely..

Thank you. One moment for questions. Our next question comes from Myles Walton with Wolfe Research. You may proceed..

Thanks. Good morning. Kathy, you mentioned margin expansion in '24 but obviously the margins for '23 in the guidance have actually come down. So, I'm just wondering could you put a quantum to the margin expansion you're looking for in '24 as it to just get back to where prior '23 was.

And then maybe for Dave just a clarification, the 10-Q mentions a $100 million gain in the third quarter.

That is into new guidance, I wouldn’t imagine just yet, is that correct?.

So, I'll start and then turn it to Dave. As I think about margin profile, we do expect the second half of this year to be stronger than the first half and based on our guide you could expect us to see that progress that we have largely from macroeconomic disruptions dissipating through the year to continue into 2024.

The mix shift that I focus is more gradual. I talked about that shift toward 60% fixed price in 2027, so you could think of that as a progression through 2024 to those later years. And so, we're not going to guide today around 2024. We will provide just some more specifics as the year progresses and certainly at the beginning of the year next year.

But you could think of it as a steady progression of improvement not a dramatic change from where we've been performing this year..

And I could touch on the $100 million gain you referenced that that's just an approximation, of course we've until that closes. We do expect that sale of an international minority investment to close in Q3. And that's the item for which we'd increased our guidance range by $0.40 last quarter.

So, that is incorporated into our guidance net, net we see that in that $0.40 range of benefit to the company. So, we're pleased to have that approaching and look forward to the cash inflow from it as well..

Okay. Thank you..

Thank you. One moment for question. Our next question comes from David Strauss with Barclays. You may proceed..

Good morning, and thank you..

Kathy, so you're -- the growth rates accelerated a little bit faster in '23 than you had initially anticipated. As we think about '24 with AES returning to growth and I assume space growth slowing a little bit.

Would you expect topline growth in a similar range or is it possible that we could still see an acceleration next year overall for the company evolve. Thanks..

Right. So, we're really pleased with the progress that we've seen this year, our sales guidance increasing at space and TS and our other two sectors continuing to see progression towards their growth objectives as well.

As we think about this year, a good portion of that growth is the strong backlog that we developed and continued win of competitive bid.

Part of it too though is what we've been talking about with the phenomena of having supplier deliveries to late last year and starting to come in this year having ramped our headcount significantly in the latter part of last year and early part of this year, is contributing to growth rate.

Those elements you wouldn’t think of as it continued, it was a bit of at that wave that we've now seen come into this year. But the growth based on backlog performance and new winds, we do expect to continue into next year and its better see another year of healthy growth in 2024..

And the other point I'd add is to your point David around the segment level view. We do expect the growth to be more balanced going forward with opportunities for growth in each of the four sectors as we demonstrated in this period in Q2. We see the growth in our defense systems business having recovered really nicely over the last couple of quarters.

There were continued opportunities really across all four of the segments to drive growth..

Great. A quick follow-up on the F-18.

How big is that still for you today and when would you expect that to completely run off?.

Sure. Consistent with the commentary from our prime on the program, we do anticipate that production will wind down over the next couple of years. And for us it's 1% or less of sales and therefore not too dramatically impactful to the overall company topline.

It's incorporated into our thinking about opportunities for growth in sales that AES over the next couple of years as are the other moving pieces we talked about throughout the call today..

Thank you. One moment for questions. Our next question comes from Jason Gursky with Citigroup. You may proceed..

Yes, and good morning everybody. Audio has been a little choppy this morning. So, I apologize if you've already commented on this. But the comments you made early in your prepared remarks Kathy about the backlog of which you had at the end of '21 and where you are going to sit as you exit this year with having delivered about 70% of that backlog.

I'm just kind of curious the remaining 30% that is still in front of you, what how big is the B-21 program in the remainder of that 30% which you've got still going on?.

So, the remainder of backlog on B-21 is relatively small because what's in backlog is the EMD program completion. Production has yet to be awarded, so the lots we've been talking about is how to get to the first slot of production and contract later this year.

But of course, it is priced and so that is a contractual commitment, but we have not yet been awarded it, so it's not showing up in backlog.

Programs that are a significant amount of that backlog, our program like Sentinel, a sizable program that was awarded in 2020 or 2021 and is going to carry forward for several more years as part of that EMD program and backlog. And there are several others, but none that rise to that level.

But I will remind you that Sentinel program is a cost plus program..

Right. So to that point, among the fixed price programs, where we talked about the 70% of that 2021 backlog having been transitioned into sales by the end of this year, there are no huge individual drivers of the remainder of -- the remaining 30%, if you will, and that will gradually translate into sales over the next few years.

So a gradual wind down of the remaining 30%, based on the metrics we described earlier..

Okay, right. And then I'm sorry to beat a dead horse here on the space margins. But I did find your comment, Kathy, interesting about the potential for the business to operate above 10%, I think you said you want to drive it to 10. But there'll be opportunities for it potentially to go above that metric at some point in the future.

I'm just kind of curious as to whether that is a comment for the broad portfolio of your space programs because when I historically think of spacecraft and space based assets, I tend to think of lower margin rates for that kind of work historically because it's been a lot of cost plus kind of work.

So I'm wondering if this is a comment about the broad portfolio and would include assets that are going to be operating up in space? And is that comment -- if that is true, is it because you've got more fixed price work going on there than has historically been the case?.

Yes, so as you think about the transition that the space market has undergone to where we had few large and exquisite assets, those were largely developed under cost plus and then transition to production but in low quantity, now we're seeing much less dollars go into development, and then a transition into production of higher quantity.

So that mix will be different in terms of development versus production in the market as a whole.

In addition, when you think about our portfolio and what's in our space segment, it includes things like solid rocket motors, particularly large solid rocket motors, it includes programs like Sentinel that will transition into production, and programs like [indiscernible] that we've talked about so as those transitions happen again, specifically now to our portfolio, not just the market in general for space, we've seen mix shift that will be tailwinds to margin over time..

Josh, we have time for one more question..

Operator:.

[:.

Hey, good morning.

Kathy, just sticking with that a little bit and tying this to the prime versus merchant supplier discussion we had in the beginning on aeronautics, when you think about the shift, at least in satellites from GEOs to MEOs and LEOs when these highly proliferated constellations, and the significant to the SDA in that part of the market and their desire for fixed price contracts, is it better, at least in that kind of work to be on the supplier side at some point would you consider that?.

We consider it with each opportunity, just as I discussed in Alpha process around military aircraft, we don't have a blanket, we will do this and we won't do that we think about each opportunity in terms of its risk profile.

The maturity of our designs and offerings at the time that we're being asked to bid also weighs heavily into our thinking about that decision. And so in the case of the Space Development Agency, we are executing on several programs for them today and performing quite well.

So we have chosen wisely and been disciplined in how we have taken on that work and will continue to do that. The beauty of our portfolio, as we've talked about before, is we can choose to prime.

But if we don't see the right mix of risk reward we can also choose to be a supplier and still bring the capability forward that the government needs and expects from us..

Thank you..

Great. Well, I think that's about all we have time for. So thank you to each of you for joining our call today. I also again want to extend my appreciation to the Northrop Grumman team for their continued strong performance and contribution to global security.

I hope that all of you enjoy the remainder of your summer and I look forward to seeing you throughout the summer and talking to you again in October. Take care..

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