Chris Cage: Yeah Peter, it’s Chris. Let me get started with a little bit of color on DES and then turn it to Tom. I mean. You know again this has been a longer growth story than we originally anticipated, but it’s a nice one. The team is performing exceptionally well. We’ve actually extended from one task order now to five active task orders under the program, and it will be on a growth trajectory over the still the next couple years. ‘24 will be stronger than ‘23 on both the top and bottom line and we’ve seen good migration on the planning efforts, working closely with the customer, and the DAFA’s to get them ready for more migrations as we progress through 2024. So all I can tell you is it’ll be a contributor to growth this year, not as significant as maybe once envisioned, but really looking forward to that growth rate continuing to accelerate later this year and into ‘25.
Tom Bell: And Peter, I’m going to answer you’re – the punch line first and then give you some color. No, M&A is not a priority in 2024. It continues to be in the playbook, but subordinated to other deployments of cash. As Chris articulated in his prepared comments, we’ve already provisioned to repurchase $500 million worth of Leidos shares this year. I’m happy to share with you that that is not all the bullets in our ammunition. We have other ability to deploy cash for great ideas that start to come out of the strategy process that I spoke to. And we’re very excited about bringing forward those ideas and deploying cash responsibly, organically in great capabilities and great technologies that will enable us to have differentiated solutions going forward.
Ultimately the five sector strategies that the Presidents are building will not ignore M&A, but the primary focus first and foremost will be what are the gaps, what are the needs we see our customers needing and how do we position Leidos best for those over time. Obviously if we can build it, we have the funds and the capability to provision for that. But if it’s better, faster, cheaper and more expeditious for us to buy that, then M&A can come back into the playbook. But those will be a very thoughtful process through this year of strategy, where we carefully think through the playbook for what inorganic plays make sense for the North Star strategy we’re creating. I hope that helps Peter.
Peter Arment : Very much so thanks. Thanks Tom. I appreciate it.
Operator: One moment for our next question. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.
Noah Poponak : Hi. Good morning everyone.
Tom Bell: Hey Noah.
Chris Cage: Hey Noah.
Noah Poponak : The Civil margin, I guess for the full year ended up flat year-over-year and not a ton of discussion in the prepared remarks here, I guess, despite the consternation there early in the year. So have we sounded the all clear? Maybe you could just spend a little more time on where you stand in stabilizing the challenges you’ve had there. And is the quarterly progression on the Civil margin through 2024 a ramp up like the last two years or is it more stable?
Chris Cage: Yeah Noah. Hey, this is Chris. I’ll get started and maybe Tom can talk big picture. So Civil is obviously more than SES, but that kind of is implicit is where you’re going. And I really applaud the team for great progress and ‘23 to right the ship, and ultimately revenue and margins were in line with our expectations. So the SES business itself is improving. We were higher on revenues year-over-year, but minimal contribution sequentially from product mix. So as we pivot into ’24, we’ll expect the pattern to kind of not be as pronounced as in ’23, but probably lower in the early part of the year, accelerating towards the back half of the year, how we see that rolling out right now. We’re not all the way done, but we are you know well down the road on executing all of the turnaround efforts that we put in place and some of the things where we’re exiting certain geographies.
That’s a thoughtful, carefully orchestrated process, right, that takes sometimes many quarters to fully see it through. But I’d say, we’re in line with where we had hoped to be at this point in time and I think the business is looking forward to better days ahead.
Tom Bell: Yeah, I would echo that Noah. And just give a quick shout out to Vicki who has taken on the responsibilities for this sector with great vim and vigor, and the person leading SES, Michael Van Gelder, just a rock star for us at Leidos. And they are taking this reset business and really they are excited about the opportunities that the market is presenting to us to grow, both in the traditional places and non-traditional places. So they and we remain bullish on the long term outlook for this business and we’re excited to be in this aspect of the market.
Noah Poponak : Okay, great. And then just on Health. You’ve sort of touched on this, but just the year-over-year comparison will be pretty different in the first half or the back half next year. And then, the exit rate on the margin is a lot different than where you started the year. Any color you can provide on the cadence of the growth rate and the margin through the quarters of the year, not to ask – like they ask quarterly questions, but just seems like we could all be kind of thrown off on versus what you’re expecting there.
Tom Bell: Yeah, I mean Noah, it’s a little nuance there, and you know again without too many specifics, just keep in mind, in Q3 we did have a request for like a little adjustment. That contributed some uplift in profitability and Q4 we benefited from nice incentive performance. I think our commentary in the past and it still holds true is, the customer is expecting industry to continue to step up volumes to meet the increased demand and therefore the threshold on throughput continues to rise to achieve full incentive. So early in the year our expectation is we’ll have some work to do to be ready to be able to prosecute that level of demand to earn full incentives. So therefore it’s probably safer to assume that pattern will improve as the year progresses forward.
The main point is, investing to make sure are the veterans get treated and seen and get the care and the benefits they are entitled to and we are looking forward to continue to make those investments to prosecute that work as timely as possible.
Noah Poponak : Okay. Thanks so much.
Tom Bell: Thank you.
Operator: One moment for our next question. Our next question comes from Bert Subin with Stifel. Your line is open.
Bert Subin: Hey, good morning, Tom, Chris.
Tom Bell: Hey, Bert. Good morning.
Bert Subin: Chris, if we think about the revenue growth for you in terms of hiring inflation, does 2% to 4% growth indicate you’re carrying some additional costs just because inflation is going to be in that range and hiring is presumably positive. And then on, I guess, another sort of related question on the revenue side, as we think about outlays like the normalizing at some point soon, how do you capture that in that 2% to 4%?
Chris Cage: Yeah Bert, obviously the inflationary environment has been volatile, but it’s been improving. And so as we progress into ’24, our outlook in that regard is it’s moderated down relative to where we were a year ago. So I’m not worried that we’ve got an imbalance between our top line and bottom line as it relates to inflationary impacts on the business. We’ve anticipated a robust merit pool for our labor costs and we understand how those will be passed along to certain customers under our cost reimbursement programs. But our pricing patterns have anticipated this inflationary environment now over the last couple years. So as it relates to protecting the margin, the downside on inflation, I feel good about where we’re positioned there.
Obviously, on the outlay side, there’s always this lag, right, between the budget and the outlay and the timing that it’s difficult to project. Certainly it’s an area that we could see some things accelerate in the near term, depending upon how we get through March in the budget environment. But right now I’d say that, that’s not a significant driver as far as any pent up outlays that we’re waiting to have, happen to drive significant growth catalyst for us.
Tom Bell: And I – if you don’t mind, Bert, I’m going to piggyback on that to give some comments about our people. We ended the year with 47,000 employees, up about 3% year-on-year. But the most exciting thing about our whole HR system in 2023 was attrition at very good levels for our industry, low levels for our industry. And one of the reasons we do that is not only do we have a competitive structure in our compensation plan, but we also are investing in our talented employees with technical upskilling, which is being taken up by thousands of our employees who remain curious about things like AI and Cyber and Autonomy. And the technical upskilling we have allows us to hold on to those employees and upskill them in place, because as you’ll appreciate, it’s one thing to pay for talent.
It’s a whole different ball of wax to have to constantly bring on new talent. So we’re very excited about the attrition rates being low, the uptake in our technical upskilling being very high, and therefore that being a lever that we’re using to manage our personnel costs.
Bert Subin:
-: Are there other meaningful opportunities out there, like not maybe the VA-MDs, but like RHRP and Military Family Counseling and others in the backlog and the pipeline that you think, could make clinical a bigger part of the business longer term?
Tom Bell: Yeah, the short answer to that is, yes, we do think there are opportunities for us to grow this business, and that is the very task that Liz and her team are undertaking. It’s one thing to say yes, there are opportunities. It’s another thing to think how do we prudently and purposefully execute a plan to grow that business in the lowest risk possible. That’s very much what Liz and her team are focused on right now and part of the process that we’ll be reviewing through the year.
