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Influencers with Andy Serwer: Kathy Warden

In this week's episode of Influencers, Andy sits down with Northrop Grumman Chair and CEO Kathy Warden to discuss the defense and technology company's current business, its role in ongoing geopolitical and military conflicts, and its most exciting endeavor to date.

Video Transcript

[MUSIC PLAYING]

- In this episode of "Influencers," Northrop Grumman chair and CEO Kathy Warden.

KATHY WARDEN: From an industrial-based perspective, the US, even more so than any other part of the world, feels a responsibility for global security. We don't build weapons with an intent to go to war.

We build weapons with an intent to deter conflict and achieve peaceful resolution. Space is the most exciting area of our portfolio at the moment, because the expansion of opportunity in space has been significant.

[MUSIC PLAYING]

ANDY SERWER: Hello, everyone. And welcome to "Influencers." I'm Andy Serwer. And welcome to our guest, Kathy Warden, Chairman and CEO of Northrop Grumman. Kathy, nice to see you. Thank you for joining us.

KATHY WARDEN: Thank you, Andy. It's great to be with you.

ANDY SERWER: So let's talk about your company, about $36 billion in sales in 2021. Can you tell us what Northrop Grumman does, specifically, what products and services you make and provide?

KATHY WARDEN: Northrop Grumman is an aerospace and defense company. So we largely work with the US government and global governments to provide support to national security. But at our core, Andy, we're really a technology company.

We are delivering technology innovations that help the US and our allies stay at the forefront of capabilities that provide deterrence and support national security interests. Our fastest growing business and our largest, is our space business.

And in that organization, we provide everything from propulsion that gets satellites into space to the satellites, themselves. We support communications, collections of intelligence, as well as reservicing to the International Space Station, as-- a for instance.

In our aero business, we largely build aircraft, unmanned and manned aircraft, for the US military and our allies. And in our mission systems and defense businesses, we're providing computing communications, command and control. So think of those as electronics and what you would use every day as technology that our military also needs to be able to operate.

ANDY SERWER: I want to switch over and talk about the stock, Kathy, because it's been a pretty good story for you guys. You have about a $76 billion market cap with a stock up about 35% over the past year. Well, the market's down a few points. What's the story behind that and do you see that continuing?

KATHY WARDEN: Well, the story behind it really starts with the threat environment in which we're operating. As our government looks to expand deterrence capabilities for the environment that we face not only today, but well into the future, there is a recapitalization of many of the weapons systems that the US relies on for deterrence and when necessary, to support conflict.

So that threat environment means that defense budgets are growing both in the US and around the globe with our Allied partners. But I'd say that our company has also been successful positioning to provide the capabilities that our partners need.

And that has allowed us to have a backlog of over two time sales, and as you mentioned, have a nice growth track record for the last several years.

ANDY SERWER: I want to ask you about the economy and your take on the current economic conditions, A, and then B, how salient really is that to your business? Or is it all really based on the threat environment?

KATHY WARDEN: Well, the supply-side challenges are real for our industry. And as we look at the pace of growth, it could be faster if we did not have those supply-side challenges. And when I talk about supply-side, I'm talking about labor and the challenge in getting technical workers, in particular, but also workers on our manufacturing floor.

And I'm also talking about supply of parts. There are certain parts that we rely on. Chips is talked about most frequently. But there are many others that are in shorter supply than the demand calls for today.

So while we look at budgets and the threat environment to drive demand, we need to also focus on these supply-side issues and put mitigations in place to address those, as well.

ANDY SERWER: When it comes to those components, Kathy, chips, you mentioned, and I'm sure there are other components, as well, that you maybe source from overseas, has that become more fraught, just as the world has become maybe deglobalized to a degree, and you have to really assess and reassess where you're getting those components from?

KATHY WARDEN: Absolutely. We had been attentive to that in the aerospace and defense industry, even before the recent challenges with supply availability. But we have doubled down on those efforts to make sure we're tracing components to their very origin, know where they come from, and looking at our approaches for assuring supply.

And in many cases, that does mean friend-shoring, a term that some folks may not be familiar with, but it really means putting the sources of supply not only in the United States, but with Allied partners as part of that onshoring responsibility that we feel we have to be able to deliver parts when needed, even if we find ourselves in conflict with other nations.

ANDY SERWER: And talk a little bit more about this labor supply issue. I mean, all chief executives and people running small stores are dealing with this right now. What are you doing to mitigate that? Are you raising salaries? Are you offering different types of benefits? Can you talk about that a little bit, please?

KATHY WARDEN: Absolutely. We're doing all the things you just mentioned and more. So yes, we are raising our salaries. We are working to remain competitive in an environment where salaries are escalating at the most rapid pace I've seen in several decades.

We also are providing training and pathways for people into our company that are less traditional. And what I mean by that, is we no longer require degrees for many of our jobs that would have in the past. We are opening those jobs up to skills-based hiring.

And we're helping our new employees get the skills they need once on the job. So standing-up training centers both inside the company and partnering, in many cases, with community colleges or local educational institutions where we do business to put programs in place that rapidly teach the skills our employees need to be successful.

And that's worked very well for us. So our hiring has remained strong, but we are every day working to create new sources of technical talent.

ANDY SERWER: And just a quick follow-up on that, what about attrition?

KATHY WARDEN: Mm-hmm.

ANDY SERWER: Are you seeing that? Is that a problem, and how are you addressing that?

KATHY WARDEN: We are. Attrition is higher than it was before the pandemic. And of course, during the pandemic, it was much lower. So some of this turnover is to be expected as people didn't move for the last couple of years and then looked for new opportunities as the economy recovered.

What I will say, is that our attrition is still well below the national averages. And so we feel good about the work that we're doing to keep people with Northrop Grumman. But there's always more work to do there.

And we also, in recent months, have seen that start to tail down. And I expect that is a result, not only of the efforts that we're doing, but the labor market is starting to soften a bit.

ANDY SERWER: Yeah even given that last point, though, and maybe I'm leading the witness here, Kathy, so forgive me. But with all this talk about recession, I mean, it seems there are other signs that things are pretty strong, right?

KATHY WARDEN: Yes, Andy. I wouldn't say that we are in a recession. And the core reason for that is the strength of employment in this country. I do see signs that we could be headed into a recession.

And what that would mean, is the labor market likely will soften more. Some of the escalation and labor rates would start to even out. And in some ways, that is a healthy trend, a more sustainable set of workforce dynamics.

But I also believe we need to get more people in the country working and get labor participation rates up. That's really what will drive a better balance of supply and demand of people that we all need to fuel the growth that we have.

ANDY SERWER: You know, you have such an unusual business in that your biggest customer is the US government. The-- I guess the Air Force and the Navy are the two biggest branches of the military that you guys provide products to?

And I wonder, you know, other CEOs are seeing pressures on the input side. And so naturally, they're considering raising prices. But how does that work when the US government is your customer?

KATHY WARDEN: We can't unilaterally raise prices, you note. So this is a series of negotiations that we have with our customers to ensure that we still maintain a healthy industrial base to support the industry.

And the reality is, our government hasn't seen this level of inflation in the lifetime of most of their employees, either. So we're working in partnership with the US government to understand how inflation is flowing through to their programs, what that means for their budgeting.

Because they have to go to Congress and ask for the additional funding to cover these cost increases and then negotiate that into contracts with companies like Northrop Grumman.

I will say that the US government has been very empathetic to the overall issues that the industrial base is facing, particularly for our mid-tier and small suppliers because we don't want those companies to-- who have less sustaining power, to go out of business at a time like this.

They're very important to the systems that we build and national security, as well as economic prosperity. And so the US government has been a good partner in working with us to resolve those issues and get contracts renegotiated.

ANDY SERWER: I want to drill down a little bit here and talk about what's going on in Europe and Russia and Ukraine. My understanding is, and correct me if I'm wrong, that you guys are not doing business with the Russians or were banned from Russia. Can you talk about that, first of all, at all.

KATHY WARDEN: Well, we were, until very recently, buying rocket engines from Russia. And this was an agreed upon relationship between the US and Russian governments through NASA. And we did just break that relationship and have put in place an alternative source for supplying those rocket engines to allow us to still provide resupply to the International Space Station.

And so now, we, Northrop Grumman, no longer have any reliance on Russian supply. And that is a place that we wanted to be in working with the US government, but wanted to do in a way that all parties were involved in a smooth transition. And that's what we were able to accomplish.

ANDY SERWER: Yeah, I mean, it's-- you could argue that it's too bad. I mean, it seems like the Space Station was one place where the United States and Russia was cooperating. And it-- I gather that seems to be breaking down a little bit.

KATHY WARDEN: Well, I would let NASA comment on the relationship that still exists behind the International Space Station. But it's been a long-term objective of the US to have our own US-based supply of rocket engines that would support propulsion to space.

And so this was a natural evolution that was bound to happen. And yes, I would say that it broke down a little more rapidly because of the conflict in Ukraine and Russia's actions there. But there is still a desire-- and again, NASA would comment on this more fully-- for cooperation related to the Space Station.

ANDY SERWER: And that's fascinating. And what about Ukraine, itself, Kathy? Are you guys, is Northrop Grumman supplying arms to the Ukrainians? How are you guys involved in that theater?

KATHY WARDEN: We are supplying arms to the Ukrainians, largely through the US and European Allies. And we do that through contracts that we have with those governments, not directly to the government of Ukraine. And we're proud to be supporting the efforts of the Ukrainian people.

It's very sad to see what has happened in that country, and a recognition that innocent people are losing their lives on a daily basis related to not being able to protect and defend themselves. So we want to give them the opportunity to do so.

ANDY SERWER: I think almost all Americans, Kathy, would support the defense industry that keeps our country strong, and our allies, as well. Some people raise questions about weapons and systems falling into the wrong hands, globally. How do you prevent what you make from falling into the wrong hands through third party sales and such? What do you do there?

KATHY WARDEN: Well, we take that responsibility very seriously, and as does the government. And so we first have a process in place that very closely regulates and monitors who we sell certain products to.

And we also look at protecting those systems in ways to assure that if they were to fall in the wrong hands, we would still be able to support a response to that. I would say that from an industrial-base perspective, the US, even more so than any other part of the world, feels a responsibility for global security.

And therefore, we are very much aligned to a philosophy that we don't build weapons with an intent to go to war. We build weapons with an intent to deter conflict and achieve peaceful resolution.

And so our company-- and I personally-- am in this industry because I feel strongly that our role in national security is actually keeping the world and the people in it safer every day, not driving us toward conflict.

ANDY SERWER: A recent "Financial Times" story reported that you thought that US needed to increase weapons stockpiles for the war in Ukraine. Is that accurate? And if so, can you explain that a little bit?

KATHY WARDEN: I was simply pointing out that as we have provided weapons to Ukraine, that was an unplanned utilization of those weapons and stockpile and that we would naturally need to replenish them, and the path forward on how to replenish those, and what to replenish them with.

Because in some cases, these are stockpiles that have been built up over many years, is work that we are collectively doing with the US government to define what's the timeline for that, what will they buy, and what do they need industry to do to be ready to produce at that higher rate?

And it's not just Northrop Grumman that's doing that. The whole industrial base is pulling together, as we have in times of conflict over many decades. You know, I think back to World War II.

When our company was really coming to fruition, was right before World War II. And we immediately launched in to significant production capacity efforts to support what the US and our allies needed.

ANDY SERWER: Taiwan is another point of potential threat or friction, I guess, if you will, between the United States and China. How is Northrop Grumman positioned there? Have there been new sales because of what's going on there?

And also, to what extent does the Pentagon or the White House reach out to you or your company to talk about what you're making and how that might be deployed in a place like that part of the world?

KATHY WARDEN: Well, we have the fortunate opportunity and responsibility to work with the US government and our allies around the globe to be involved in those discussions about what they need in different theaters of competition or conflict, and ensure that we are investing in the right things that give them that capability.

We also are able to work with the US government on export of products and services. And you noted Taiwan. There certainly is interest, not only in Taiwan, but in the entire Asia-Pacific theater to ensure that our allies have what they need to protect themselves and deter aggressors from entering into their sovereign space.

And so this isn't just about selling directly to the US. But often, we sell through US into those countries to ensure that we stay aligned on foreign policy.

ANDY SERWER: Does the Pentagon ask you for your take on what's going on in Taiwan or for your take on what's going on in Ukraine?

KATHY WARDEN: They do. But they clearly are the expert in interpreting intelligence data on the risk posture, the threat posture. And what we help them to do, is understand how can technology be applied in ways that give them the best value and capability to deter and defend.

ANDY SERWER: We've already talked a little bit about the Space Station. Talk to us just sort of writ large about your space business. And also, how does that jibe, if you will, with the private endeavors being done by Jeff Bezos and Elon Musk, of course? Is your work adjacent, is it complementary, or are you working directly with them?

KATHY WARDEN: Well, space is the most exciting area of our portfolio at the moment because the expansion of opportunity in space has been significant. And I foresee that continuing into the future.

And as you noted, it's in every domain, clearly supporting national security, but also in space exploration, like the work that we recently launched, the James Webb Space Telescope, and brought back just fantastic images of the origins of our universe that will help to rewrite science textbooks and help, I hope, a new generation of people to get really excited about what may be happening in space in generations to come.

And many of the companies that we work with and partner with are equally excited about that. Jeff's work is clearly driving for better exploration of space, as well as the opportunities to commercialize space. And we partner with them. And we also do work that, at times, is competitive with them.

We are, as the nature of our work being so broad, the largest space company in the world. And we're proud of that and want to continue to do our part, both in supporting governments, as well as space exploration and commercial interests.

ANDY SERWER: You didn't mention SpaceX.

KATHY WARDEN: We work with SpaceX, as well. We just announced a partnership with Firefly, a much smaller company. We have dozens of partners that we work with in the space arena.

ANDY SERWER: And you mentioned the James Webb Space Telescope. That must have been pretty exciting when all of a sudden, you know, the work that you guys do ends up, you know, part of popular culture, "The Today Show," and all of that. What was that like?

KATHY WARDEN: Well, it's a tremendous point of pride for our team who has worked on the telescope. And now we are really excited at what the imagery might tell us about the existence of life-sustaining options on other exoplanets, which I can tell you, I have met more Americans who come up and just-- average people saying, I am following what's going on with Webb. It's creating a real excitement.

And we are so pleased to be contributing to that energy and excitement around space. I don't think that our country has seen that kind of desire to understand and be part of space exploration since the 60s. And so it's a once-in-a-lifetime opportunity from my perspective.

ANDY SERWER: Let's talk about your career a little bit, Kathy. You worked at GE for roughly a decade. What was that like? A lot of people, of course, talk about how great working at GE was, and it was a cradle of management. On the other hand, it's been sort of reassessed lately with reassessing Jack Welch. What's your takeaway from that whole period of your life?

KATHY WARDEN: Well, I really look back and believe that I learned a tremendous amount in the time that I spent at General Electric from the leaders that I had the opportunity to work with, including my time there which was under Jack's leadership as the CEO of the company. And I still have great admiration for both the company and the people that I had the opportunity to work with.

It is disappointing to see what has happened to the company and where it is positioned today. But I still believe it is a great company, and at its core, has generated tremendous opportunity for many, many people who have gone on to serve in other industries, and in my case our country, in ways that we wouldn't have had the opportunity to do or the experiences and the knowledge to do without our time at General Electric.

ANDY SERWER: I know you've been asked this before, Kathy, but I'd still love to hear from you on this, which is, what is it like being a woman in what has to be mostly a male-dominated business? Opportunities? Challenges? Problems?

KATHY WARDEN: I certainly do find myself often as the only female in the room. And yet, I don't view that as a challenge. I do look at it as a person who is doing their best to lead this company, contribute to global security. And I want to be recognized for that, not my gender.

But I'm proud of the fact that I am a female who is holding this position in our company for the first time. And that if others look and see that as inspiration, I want to share that story, that it is possible to reach these levels, even if what you see when you look up in your leadership chain still is mostly male dominated.

So I would just encourage everyone to, whether you see the level of diversity that you aspire to have in your company when you look up, there is change afoot. And you can be part of it. So do your best and keep working toward those goals.

ANDY SERWER: And final question, Kathy. Did you see the new "Top Gun" movie? And what did you think of it? And was Northrop Grumman involved in any way?

KATHY WARDEN: So ironically, I have not seen the new "Top Gun" movie. But I did see the first one many, many times because Northrop Grumman products are prominently featured in the first "Top Gun" movie.

You know, we built both the aircraft that was the one that the Navy pilots used, as well as the aircraft that was used in the original "Top Gun" to replicate the Russian fighters. So we have a proud history of as a company building fighter jets.

And we're always happy when our products make it into movies. There are more than a dozen movies that have featured Northrop Grumman product over the years, and that being probably the most notable one.

ANDY SERWER: Well maybe it's just because you're too busy so you need a little personal time off so you can go out to the movies. Kathy Warden, Chairman and CEO of Northrop Grumman, thank you so much for your time.

KATHY WARDEN: Thank you, Andy. Great to spend time with you today.

ANDY SERWER: You've been watching "Influencers." I'm Andy Serwer. We'll see you next time.