Chris Cage: Yeah, Matt, I would just add. I mean, we’re excited about getting our Charleston facility up and running and the team’s been doing a good job there. Actually, the leadership team will be down there next week to lay eyes on it ourselves. So we’re looking forward to seeing that. There’s a variety of products. I won’t get into specifics about which ones we’re pulling out of the portfolio, but clearly, we’re focused on where we have technical differentiation, leadership positions, people screening has been a strength of that business for a long time. You can imagine that’ll be something we continue to stick with and double down on. We have excellent suite of port and borders equipment, but there’s some pockets of the check baggage, checkpoint baggage, et cetera, that we just have to continue to evaluate where we’re positioned and make those changes accordingly.
Matthew Akers: Great. Thank you. And then I also want to ask on CapEx, a little bit of a slow start to the year. I might have missed it, but is $190 million still the right way to think about that for this year? And does that sort of ramp up through the year?
Chris Cage: Yeah, Matt, that’s still our budget and there’s a little bit of reserve in there. And we ask the teams to be smart and disciplined even when we allocate them approvals, but you’ll see a few things ramp up. We’ve got our San Diego facility that we’re going to be proud of to get a brand new facility for a lot of our classified work out in San Diego completed this summer. And the teams are also looking for interesting ways that we can get in front of the customer on unmanned capabilities, demos, test beds, et cetera. So we expect that to ramp up a little bit, but we’ll continue to manage that tightly.
Matthew Akers: Okay, great.
Tom Bell: Chris mentioned San Diego a little bit. I’ll just footstomp the great job the team is doing there. We’re building a facility that will be world class in terms of security and up to the latest standards of our nation. And so we’ll have facilities on the West Coast that are as good as any and better than most. And we’re very excited about the conversations and the opportunities that will unlock for us with our customers and the opportunity, therefore, to serve them at the highest classification levels.
Matthew Akers: Great. Thank you both.
Operator: Thank you. Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open.
Noah Poponak: Hi. Good morning, everyone.
Chris Cage: Hey, Noah.
Tom Bell: Good morning, Noah.
Noah Poponak: So I guess on the margins the — in the quarter, the total company EBITDA margin over 12%. Despite what you’re saying about defense systems and the back half of last year, kind of mid-11s with the same thing and a little bit more normal health margin, I guess, just without even putting a time frame on it. But just as you go forward beyond this year, should we all be thinking of Leidos as a 12% plus EBITDA margin business or is that getting ahead of ourselves depending on where Health and Civil shake out?
Tom Bell: Well, no. We’re not in the point where we’re guiding to 2025 and beyond. But I remember last year when we were wrapping up the year, we were talking about us being high-10s, high-10s business, and people were chastising me for suggesting we might be over 11. Now we’re proving we can be over 11. And I’m very eager to see what the full potential of this business is. That’s not a commitment to maintain margins at a certain level. We’re going to make smart decisions. We’re not going to get locked into certain preconceived notions of where we want to go. But better is always good. And we want to bank those gains and expand and exploit other areas to grow the business. So as we’ve guided this year, high-11s is our commitment to you in 2024. And as we prosecute 2025, we’ll be very eager to see if we can meet or better that. Chris, anything?
Chris Cage: Well, mid to high-11s. Tom, I just want to make sure the team doesn’t run away from us here on their models. But no, your points are well made. I think that we have lines of business that haven’t reached their full potential and we’re driving them in that direction and capitalizing on the gains we’ve made. We’re going to continue to invest, to stay ahead of demand. So those are things that we’ll have to evaluate where those opportunities are Noah. But clearly, you can see this business has a lot of potential and we’re going to continue to unlock it.
Noah Poponak: Okay. And Tom, you sound pretty positive on bid and proposal. It sounds like you’re making changes there as well. The company’s had a lot of growth in the all-in-total backlog number. It’s been kind of flatter on that funded number and the funded book-to-bill or your stated book-to-bill, it’s been decent but it’s seen higher numbers in the past, I guess. Are you expecting or should we be expecting that those numbers to improve through this year or does it take you a little more time to make any changes you’re making on the B&P side?
Tom Bell: Thanks for that. And yes, we’ve put the right team in place to execute the vision for us being a growing business profitably focused on profitable growth and so the pipeline is being refined to go after aggressively the right business, not all business. You remember one of my sayings, not all business is good business. And for Leidos, people understand that message and are priming the pump of the pipeline accordingly. We’ve got a healthy backlog, as you rightly call out. I’m not a big fan of these quarterly book-to-bill ratios because they are a fool’s mission. The right thing to do is focus on a healthy backlog of profitable growth. And we’re not embarrassed by the backlog we’ve got. It’s up 4% year-over-year and we’re looking to improve that as the year goes on.
We’ve got a huge pipeline of opportunities in front of us. All businesses have robust pipelines of good growth. And yeah, in the latter half of this year, there are a significant number of new and takeaway businesses that we’re hoping to brag about on future calls, but we’ve got to wait and see on those things.
Noah Poponak: Okay. Thanks very much.
Tom Bell: Sure thing.
Chris Cage: Thanks, Noah.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Cai von Rumohr with TD Cowen. Your line is now open.
Cai von Rumohr: Terrific. Thank you very much. And Tom, good work on medical exams. Terrific numbers. So you mentioned that you’re approaching the ceiling on the medical exams. Can you tell us approximately when you might hit that ceiling? And can you give us any range of timeframe in terms of when we might expect a new RFP?
Chris Cage: Yeah, Cai, this is Chris. You know, again, the team’s done great work and we’re proud to serve our veterans. And it’s been volumes that the customer didn’t see coming when the original contracts were put in place. So it’s — the ceiling is structured differently. It’s based upon an exam volume and they’ve actually had to issue a justification authorization to extend that once already to give them time to run this competitive process. We believe that process should play out over the next couple of quarters and culminate by the end of government fiscal year if things stay on track. That’s the timeline we’re working towards. Obviously, it’s not entirely within our control, but our expectation is we’d have that new contractual vehicle in place beginning of our fourth quarter.
Tom Bell: Obviously, Cai, you’ll appreciate the fact that our nation can’t afford to gap this critical capability for those who have served us. And so we are very appreciative that the Veterans Administration is working with alacrity around the whole of the system and how they keep serving our veterans adequately. And we’re very much in dialogue with them to make sure that we’re positioned to make sure our veterans continue to be served.
Cai von Rumohr: Got it. And so you’ve done, folks, way better than most of the other services business. Is there any risk or thought that because you’re doing so well that the next bids might be structured so that there’s not the same profit opportunity because obviously, I would assume this has got to attract lots and lots of bidders or do you have any visibility at all or thoughts about how the VA might structure the next RFP?
Tom Bell: I think the long and short answer to that Cai is no, we don’t yet. They’re still working through that themselves. But we feel very confident in the investments we’ve made, in the facilitation that we’ve done, the technology we’ve deployed, the team we’ve assembled that we’re in a very good place to compete and continue to serve our nation, and the Veterans Administration. Exactly what the rules are and what the incentives are in the next RFP will be known in time. But whatever the customer decides to do, we’ll adjust accordingly and continue to work to make an adequate return on our investment and adequately serve our nation’s veterans. So we’re not deterred by this. We’re actually excited. The fact is we are making robust profits here because we’re serving our veterans so effectively.
We’re doing exactly what the Veterans Administration has incentivized us to do. And so it’s a good news story. And the veterans who get served, the quality of care they get coming into a Leidos QTC clinic is better than any. And the customer service and the customer reputation we have is best-in-class. So we’re very excited about it and very eager to continue to serve our nation in this way.
Cai von Rumohr: Terrific. Thanks again.
Chris Cage: Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert Spingarn with Melius Research. Your line is now open.
Robert Spingarn: Hey, good morning.
Tom Bell: Hey, Rob.
Robert Spingarn: I hope you can hear me. I’m not — this isn’t a great connection. Can you hear me okay?
Tom Bell: Yeah.
Chris Cage: Good.
Robert Spingarn: Okay, good. So, Tom, I wanted to start with a big-picture question and it’s about AI. You talked about it earlier and this is a little bit more from the industry perspective but you and your competitors generate 60% or more of your sales from cost plus and time and materials contracts. And I’m wondering if the work of consultants can be automated or done more efficiently through AI. Might that presumably lead to lower costs and reduced billable hours? And in that case, how does the value accrue to shareholders rather than all of that efficiency just being passed back to the customer?
Tom Bell: Rob, what we’re looking at with AI, and I mentioned it in my prepared remarks, is really becoming that conduit from commercial best practices and Gen AI technologies into the government space. You’ll appreciate as well as anybody the fact that the government space and the government systems have a whole bunch of idiosyncrasies and complications that people like Leidos and Leidos in particular, know very well. So the two examples I cited in my prepared remarks of Sourcegraph and Moveworks are two examples of best-in-class commercial capabilities that we’re being able to use to generate outsized productive results for our customers. What that does is it does cut down work in the customer ecosystem, but it allows the people to go do more value added work than just the trite, routine, repetitive or deeply analytical things that then we team with a human.
We’re very focused on integrating those solutions into our trusted mission AI solutions. And then we’re very keen that we don’t deploy AI and forget. We are very focused on our AI solutions being in partnership with the human being, never alone and unafraid. Chris, anything you’d like to add?
Chris Cage: Well, Rob, it’s a good question. It’s a good insight. I think we take the view that you’ve got to play the long game here. I mean if we were worried about maximizing the dollar on the current book of cost-plus contracts, I think that’d be a little bit shortsighted. So recognizing that, to Tom’s point, we can deliver more mission outcome with the same budget and then set ourselves up to be incrementally more competitive on future opportunities. That’s what’s going to play well with our customers, and that’s what’s going to keep them coming back to Leidos. So we see this perpetuating our growth momentum as we continue to invest in this capability.
Robert Spingarn: Okay. And that’s a real interesting answer. And then, Chris, just not so much following on to that, but talking about cost plus, again, I think if we look at the other side of that, I think, around 40% of revenues are fixed price. So a pretty meaningful portion. I’m wondering, I want to ask you about stale backlog. If the backlog reflects that 40%. In other words, it’s similar to the revenue profile. Is there any portion of that has pre-inflation pricing where you’d get a natural lift in margins as that work rolls off over the next couple of years and things are repriced post-inflation or with inflation?
Chris Cage: Yeah, Rob. I get where you’re going with that. And I mean there’s — I’d say there’s pockets of that, but there’s not a pervasive opportunity or concern in our current backlog. I mean a lot of it as we priced our backlog on multiyear jobs, even if it’s fixed price, we built in some inflationary expectation. Some of that, for a period of time, inflation ran hot. But the teams have flexibility on how they execute for those outcomes. And so we’re also motivated to drive efficiencies in our process. And each new bid that we’re moving forward with, we’re evaluating them on their own merits and looking for opportunities to make sure they can generate an attractive return for our shareholders. So feel good about our backlog and feel good about our pipeline and where that helps support our margin objectives over time.
Robert Spingarn: Great. Thanks for the help.
Chris Cage: Thanks, Rob.
Stuart Davis: Operator, it looks like we only have time for one more question.
Operator: Thank you. Our final question comes from the line of Jason Gursky with Citi. Your line is now open.
Jason Gursky: Great. Good morning, everybody.
Tom Bell: Hey, Jason.
Jason Gursky: Hey, Tom, you mentioned during the quarter and then here again on the call today, the Munich Security Conference and the somber event that it was. I’m just curious from a demand perspective coming out of Europe, kind of what you at Leidos are seeing these days And how do you go about taking advantage of the demand signals that you’re seeing in Europe at this point, given where you operate on that side of the pond, so to speak? And what kinds of programs you might be chasing over there?
Tom Bell: Thank you, Jason. Yeah, it was a somber sobering affair. For those of you who haven’t picked up the magazine that they published at the beginning, the title of the conference was lose-lose question mark. So that gives you a sense of the tone earlier this year. And I don’t think that that has become any more joyful. They are all 201 increasing defense budgets robustly. So there is certainly top line growth happening in Europe. But more importantly than that, my personal hypothesis is that we’re going to see defense expenditures globally, morphed from hardware to more system solutions and effectors. I beg your pardon for those words, but systems, integrated solutions, and effectors, not so much the platform that launches the product, but the actual effector for defense.
And so Leidos is particularly well positioned to serve that market, not only because we’ve got a robust presence in Europe already anchored in the UK but throughout Europe. But also because as I look at that shift in spend, not only the increase in top line, but the shift to product services and solutions and effectors from products to solutions, services, and effectors. I see Leidos in the unique opportunity to help our customers prosecute those needs. I mentioned in AUKUS, what AUKUS Pillar 2 is all about, seamless information sharing, AI, autonomy, advanced cyber, hypersonics, electronic warfare. And I mentioned — I mean this reads like a catalog of Leidos capabilities and strengths. So I think we are uniquely positioned. The fact that the US is talking about lowering the ITAR hurdles between the US and the UK as a part of all of this allows us to position ourselves even more forcefully to serve our UK customers in ways we have been inhibited from doing before.
And I think that gives us a launching off point to talk to the Baltics around undersea capabilities to talk to all about integrated air defense capabilities, to talk to all about electronic warfare capabilities. It just gives us the launching point to have much more robust conversations than we’ve been able to have before. And again, our Commercial and International segments now all aligned to have all those customer touch points aggregated into one place, so we can more jointly connect them and prosecute them with a whole of Leidos approach. I just really think is an exciting time for Leidos. So early days. They’re still doing a little stormin and normin about those budgets and how they’re going to do it. But we are not going to be haughty and say it’s all got to be us.
We also are humble partners in these things. So we’re working to find out who we might want to partner with in Europe to prosecute these even better and work with national champions as a result. So it’s a very exciting opportunity, but early days yet.
Jason Gursky: Right. Okay. That’s great. Appreciate the color on that. And then just the last one on the pipeline that you have in front of you here domestically, maybe you could just talk about what you’re seeing from a competitive perspective here of late and just general trends on the competitive environment would be great. Thanks.
Tom Bell: Yeah. So we’re doing reasonably well in defending the work we have, our recompetes and on-contract growth is good and we are very happy with our performance there. The retooling in our business capture and growth areas is all about going after the big game and making sure we put ourselves in a position to robustly prosecute new opportunities for Leidos. I feel very good about the team we’ve got. I’ve got very — the pipeline is actually stoked with those kind of takeaway opportunities, and there’s many that are well over a billion. So we’re seeing ample opportunities for Leidos to differentiate itself and competition, and we’re seeing ample customer uptake on the kind of things that Leidos does best. Chris, anything you’d like to color?
Chris Cage: Yeah, Jason, just quickly, I mean, I’d say that certainly, best value or decisions are the trend we continue to see. And I’m not seeing any crazy Ivans and the competitive set is pretty well known and understood. We pay a lot of attention to that. Oftentimes, it just comes down to are you writing a compelling proposal, getting clarity of what your solution, and do you have the unparalleled customer understanding that you need to really hit the mark on the things that they’re looking for that might not have jumped out in the RFI. So we think we’re doing that well. We think we’re focused on adding talent and depth in our account management structure to continue to do that well, and we like where we’re positioned.
