Leidos Holdings, Inc. (LDOS) Earnings Call Transcript & Summary

If I can have your attention, we're going to move on with our program. And we're delighted to have with us Leidos' CEO, Roger Krone, who I've known for many years. He's going to -- we're going to do a dialogue, and he's going to make some future-looking statements -- forward-looking statements, just so you're aware, and the 10-K filed yesterday. So you have all you need in that. So Roger, welcome. Thank you for joining us.

Thank you, Cai. We're saying we put out our -- we released our earnings yesterday, and we've filed our K. And so I think we're in really good shape relative to disclosure. So it's great to be here, and thanks for shortening my drive by 5 hours and moving the conference to the Washington DC area.

That's why we did it. That's why we did it. So Roger, you've put together a company that was pure services, you've added a lot of different businesses. You've gotten scale. You're involved in lots of areas if you look at your business. What are the key target areas that you would like to grow in? And why those areas?

Well, let's see, we're about midpoint of the guide, a little short of $15 billion for '23. I think people view us as a growth company. So to keep growing, we have to expand our breadth and depth. So in existing customers, we've got to provide more goods and services to those. So in customers like the Pentagon, that's going to be areas of growth in the Pentagon like hypersonics, like space, like areas like that. But when we go around the rest of the federal government, there's still a lot of the federal government that's, frankly, on mainframe. So move to the multicloud for some parts of the government. Other parts of the government have moved to cloud, but they're not as secure as they need to be. So there are things like confidential computing and zero-trust areas where we can offer that capability. There is as-a-service which is, we think, sort of the next transition. So we bought a 1901 platform, which is a ServiceNow as-a-Service platform. But then there's some things globally that we're excited about. Our security business, we're expanding globally into Europe and Pacific Rim. And then we like the Five Eye countries. So we want to go where the U.S. goes. We've always had a significant presence in the U.K. as we'll call it like a mini Leidos doing the same kind of work in the U.K. And then in Australia. And Cai, I'm sure you're aware and the people on the call know, we were able to buy an airborne surveillance business from Cobham and Advent and add to our portfolio in Australia. So we're in markets that are global, and we appreciate being able to grow globally.

All right. So one of the areas where you've had good growth has been kind of enterprise IT, move to the cloud, more security. It seems like the government is going through a broad movement where lots of different agencies are moving more quickly and major new systems from what they used to have. How long do you think this cycle, if you will, could last? I mean, are we early in the cycle? Halfway through? Towards the end?

Yes. Well -- yes, we talk a lot about it. And in the Pentagon, I think we've moved faster to cloud, by the way now Multicloud. But the federal government, writ large, is -- has got a long way to go. So if I were to make some guess about in the Pentagon, maybe we're at 35%, 40% transformation. You look at treasury, like there's a big procurement we have bid on called TCloud, which is the -- move the treasury to the cloud, they barely started the journey. And then some of the Pentagon support agencies, the combat support agencies, in our DES contract -- that's what DES is all about. $11.5 billion IDIQ is to take organizations like DHA and DLA and put them on in what we call DoD net and facilitate Multicloud. So there's -- it's -- it will certainly persevere way beyond my tenure with at least 5 more years, maybe 10 more years. And then we'll probably move to more as-a-service, and it will evolve. And -- we started cloud -- and now we've already moved to Multicloud and edge-to-cloud. And that's -- it's just going to continue. The pace of technology is such that, that will be a great business to be in forever.

But so we had DES, $11.5 billion came out of kind of nowhere, at least from an investor point of view. You mentioned TCloud. Are there any other big guys like that, that might come out, become confident in...

In the digital transformation area?

Yes.

And we've talked about this, as have others. Probably the next big kind of digital transformation is the FENS program with the FAA. That should be first quarter. What we have told our investors is should be award first quarter. You can almost guarantee a protest. I think that will be highly contested. So add -- award first quarter, 99 days, frankly, it could be a second round. Yes, but that one could go to Court of Federal Claims.

How big is that?

Well, of course, we haven't said because -- but it's billions. Obviously I don't want to give out our price, but I don't know, $2 billion, $3 billion, $4 billion, pretty significant. And that's in the digital transformation. In our pipeline, we have other programs in the multibillion dollars that we're looking for. We have proposed this year or we hope for an award this year.

Can you give us any help in terms of what some of the -- what are the big ones you're looking for this year?

Well, I can kind of go through the list. So I talked about FENS. We have a program where we operate the the Frederick National Lab for Cancer Research on behalf of NCI. That will have a big number headline in the big number of billions. We book it on a net basis. We get a management fee for that. So although it's going to appear as a large competition, it won't be a large revenue impact for us, and this is the way we've always accounted for it. But it is in the kind of $4 billion, $5 billion, $6 billion range. Smaller is Indian Health Service, that ought to be in first quarter. And then we proposed on some other programs. There's a logistics program for VA. There's a logistics program for the Army called CHS-6. Those are likely to be events this year. And then a real wildcard for us, Cai, is we have a bid in the $5 billion, $6 billion, $7 billion for the NASA's Human Lander Program, and we're teamed with Northrop on that. And that award Thursday on schedule could be second quarter, And we have -- we really like our offering. We have sort of a horizontal configured lander, but we know we're up against some real stiff competition on that.

Right. Do you feel your chances are better now that Elon is basically involved in other things?

Well, we're -- no. As -- Elon had the First Lander award. This will be a competition between, frankly, Bezos and ourselves. Let's see. I can't really speak to NASA's view of the billionaires. What I can tell you is that what we proposed is more traditional NASA contractor, NASA solution. And they have awarded to a billionaire, and I don't know how that program is going. I'm sure it's going well. We're just more of a traditional alternative. And if that suits the interest of the agency, then we have a better chance. But I don't really have an opinion. I think we have a very exciting concept. And especially when you start moving logistics to the surface, the way we have built our lander, the payload, you can put a habitat module there, and it can be inhabited, or we can move large habitat modules and rovers and things in our concepts. So we really like what we proposed, but we'll see what whether NASA really likes it or not.

Got it. So Indian Health, VA Logistics, CHS-6, how big are those approximately.

Indian Health, I always liked to -- let's do it by billions. Indian Health is sort of up to $1 billion. The other two, probably somewhere between $2 billion and $5 billion each. Again, without getting into the specifics which, for lots of reasons, competitive reasons, I'd prefer not to...

Right. No, no, no that's very helpful. So this should really be a good year for awards -- potential for awards?

Yes, I -- it should be -- it should look a lot like 2022, which I would tell you was a good year for us. It was an AEGIS year. It was -- and I think it was a DES year as well. So -- and I would caution, and Cai, you understand this, every company tends to book a little differently. When we booked DES, the headline was $11.5 billion, and we booked $130 million. So I think it will be a good year from winning, but from a booking, I think it's going to look a lot like last year from a book-to-bill because again like, on DES. The DES program may get to $11.5 billion, but we don't put that in or -- it doesn't go through our book-to-bill, it doesn't go into our backlog. So I think there's a lot of franchise opportunities that we're competing for, and then it's up to Chris Cage and his team on what I get to book.

All right. Got it. So you've got a lot of product development initiatives with Dynetics. And I think you've talked about growth picking up in '24. I mean there's Mayhem, there's, what, lunar lander, there's Tranche 1. I mean, what are the key -- I mean, lunar lander, obviously, a key target. What are some of the other ones that are really important where the decisions might be made in the next -- this year?

Well -- and I thought you're going to ask me a different question. Like, what are the other programs that we have in Dynetics that will accelerate our growth in '23 and in '24.

Yes, for sure. That's following.

Yes. And so if picked, enduring buyer's protection program -- enduring. Okay. Which if you all made the trip down to Huntsville in December, you saw the prototypes that we're building, which will lead to production, which will lead to a significant ramp in '24. The high-energy laser program we call IFPC-HEL is in the same category. There are other programs. There's a weapons program. There's some smaller programs that will help us to ramp as well. And then the wide field of view program, and I know Laura was just here from MDA. So we have a Tranche 1 award. The RFP for Tranche 2 is right around the corner, and I expect every other year, they're going to buy another tranche of satellites and sensors. And that's going to be a growth business for us as we deliver on Tranche 1 in '24. So a lot of things that we've already won that we just need to perform against and deliver on our commitments.

So what's the -- I mean, how secure should we feel about '24? It sounds like -- because I mean, one of my concerns is we got a lot of potentials, but they say that we have total disarray in the government as usual.

Yes. Cai, I think what you ought to feel is like we do is the future of '24 is in the hands of the team at Leidos. And if we perform and we deliver, then '24 will be a fantastic year. Yes, there are some more programs we would like to win that would help the growth in '24, but most of that -- and you know how the time constant is in our industry, it takes -- we win a program like FENS, it takes a long time to ramp. We've seen that on DES. We've seen that in other programs. So most of the growth in '24 relates to us delivering on our commitments, making things happen, the SCS business continued to recover programs like Reserve Health Readiness program to continue to recover and get staff. But we feel really confident in '23 and where we are, and we just see additional growth in '24.

Got it. So -- you mentioned energy is an area of 10% growth. Roughly how big is it?

Say that again.

The -- your energy business. You mentioned that as an area of like double digit growth. Roughly, how big and what's driving?

North of $0.5 billion, in kind of a round number. What we call our commercial energy business, we provide engineering services to investor-owned utilities. And it's been -- it is a significantly high-growing business. I mean, without giving you a number. And we have added new lines to that business in the last year. We've added electrical vehicle fleet management. So a lot of our government customers are interested in converting their fleet to EV. And we're not going to make EVs but what we find, for example, like might be the post office that says we want to convert to electric vehicles. They need a company like us who understands emission, understands electric utilities, to help them through that transition of how they could electrify their fleet. And then there are different other government organizations with massive fleets of vehicles, and that's a great growth opportunity for us. And then we've added Chief Climate Officer kind of part of our ESG. But what we found is the government agencies that are trying to set policy are awash in climate data. We're now collecting data on climate and temperatures and what's going on in the oceans all over the world. And we have literally petabytes of data. And so we've added a climate officer, and this is a great application of big data AI/ML to help those customers, like NOAA, sort through the early mountains of data. So we've added a couple of new lines, which we think will continue the growth that we've seen in our commercial energy business. And our commercial energy business certainly grows faster than the company and has a higher margin than the company average.

Okay. And then update us on the PACT awards and where they and airport security order prospects, they're picking up now that traffic is growing again?

Let's see. Our exam business has multiple lines. I'll try not to take too long on this. Let me talk specifically about the pact. It's referred to by a lot of people as the burn pits, but it's actually broader than burn pits. It's burn pits, it's [indiscernible] ships, it's other things. Some of it actually goes all the way back to Agent Orange and Vietnam. But what the PACT Act did, which was a law, is it made veterans -- certain ailments that veterans have eligible for a benefit under VA. And the way that process works in the VA is you have to submit a claim to the VA and then the VA conducts an exam. And today, most of those exams are conducted by contractors like Leidos, right? And then we we conduct a medical exam, we write a report, we give it to the VA. Then the VA adjudicates it. So we're not in adjudication. So we just started this, right? And the veterans are making claims to the VA and building inventory of claims -- and then what the VA has to do is allocate that out to -- they do some that they self-perform on, but allocate it out to contractors, of which there are several. We're one. I'm sure where Maximus is another one and Optum Serve, but -- to say we have seen this big rush in flow of PACT Act cases, I can't tell you that. I think we've seen solidification in what we call District 1 through 4, which is where the PACT Act cases would reside. I haven't seen the spike yet. And our experience with VA is it just take bit of time and lag for this to come through. We expect PACT Act volume to increase throughout the year, which will help in our specific case to offset what we call the loss of District 6 or transition exams where the VA opened competition there. And then at the same time, we have won an award for international exams, which would be accretive. But overall, we expect the strength in our exam business to remain, and this goes back to where could there be upside. There could be upside for Leidos in the number of exams but we're not being overly aggressive just because our experience with the VA is it just takes time for this to work through the VA system.

So your assumption is what? We net out to a flat year? PACT is in upper...

Yes. Relatively flat. And the mix changes a little bit. And if you were on our call -- and Cai, I know you were -- we talked about our margin becoming more normative and our health business in the mid-teens. And that's because we were sole sourced on the transition exam that we call District 6. So that's a little bit more competitive and the mix is such that -- and some other things that are going on in the health group that will cause our margin in the health group to be more, what we call, in the middle.

So what about airport security? Are the order prospects picked up there now that we're seeing traffic come back?

Yes. Yes. Yes. And we saw growth this year, and we'll see growth next year. And part of the excitement in our fourth quarter, where we both had topline growth that we saw a significant margin improvement, was from our security and inspection business. We just had a lot of equipment that we delivered in the fourth quarter. That may or may not repeat from a seasonality in 2023. But I also want to caution everyone is that -- by the way, I flew on -- I literally did. I flew on Southwest over the Christmas holidays. And if you ask me, I would tell you that air traffic is back and volumes are higher than they were pre-COVID. But that's because I was traveling in the U.S. If you're traveling in the Pacific Rim, which I'm going to do next week, volume is still way down. And so we've seen a lot of activity in the U.S., TSA. But if we look at Pacific Rim, you look at -- we had an opportunity in Hong Kong that was canceled. So the volume and the strength globally isn't there yet. And so we have not seen the recovery worldwide that we all have seen in the U.S. And we -- it's interesting being a global business. You got to be a little bit careful about what you see when you go out to Duluth that is not what you're going to see if you're in Sydney or you're in Beijing. So -- yes, good strength. It's a great margin business for us. The service revenue is strong. Again, the service revenue is tied to traffic, but the global rebound has not happened. And as you know, China is just starting to reopen, and that's a big driver of volume in the whole Pacific Rim. So you get -- we're excited about the business, but we're still probably '24, '25 before globally, we're back at pre-COVID levels.

So you have a number of revenue drivers. And I think people were a little disappointed in your revenue. I think your revenue guide is a little below where some of the street -- some of us on the street were and you mentioned, I guess, a couple of revenue headwinds. Maybe you could give us a little more color on [ Focus Fox ], what's the other one? ITEMS UFS, the NGA contract. The revenue headwinds that you have...

Well, thanks for the question, by the way, you've kind of answered it. I appreciate that. We have said there's about -- in '23 about $150 million of headwinds, really 3 programs. Our terrific Defense Health Program, which has been in our top 5 programs for a long time, is actually starting to finally ramp down. We're more than half complete -- by the way, a very successful program on cost and on schedule. But there will be a time when we've put the Cerner Millennium at all the military treatment facilities. And so we're seeing about a 10% reduction in that program year-over-year. And then...

In '23?

In '23 from '22, from a revenue standpoint. So these 3 programs add up to be about $150 million headwind. So -- and then the second is Focus Fox, which it's not late breaking news, but I was informed by my law team that -- there are 3 competitors. There was a winner. There's another competitor. I understand they protested on Monday.

The fourth one?

I can tell you that we protested yesterday, which is a re-protest after a corrective action. And we all -- so we've been very thoughtful about that program. It's a really important program to us. We have incumbency on Focus Fox, not 100%, but a significant incumbency. And then the NGA program that we lost, we had the user-defined services and then we lost user-facing services. And I like to think that we did an outstanding job or a good job on transition. So we were there until the very end. So we did have revenue on user-defined services in '22 that we won't have in '23. And collectively, think of those 3 programs is about $150 million that we'll need to catch up this year.

Now some of the -- when you have -- in your business when you have programs that go away, you get some impact this year, but the following year is the one -- and I guess, ITEMS's UFS, that NGA program pretty much the hit is this year and the...

The hit is this year. It's completely this year. We have no activity on UDS or on UFS, which is the subsequent contract for which we have no role. There will be no impact and -- we have another -- we have a very robust NGA business. Those other programs are doing fine. We're at multiple locations with NGA. And we actually view NGA -- never talked about it much. As Admiral Whitworth is thinking about how he deals with his data, and we think there's growth opportunities at NGA to help him use tools like AI/ML to get at the data to be able to free up the imagery analysts to do what they do best, but that's future work.

But I mean, so if we think about DHMSM, it's down 10% this year, but it's down in the fourth quarter. So if we think about next year, is there another...

I think you're bringing '24.

'24 Exactly. Is there another anniversary headwind? And if we think about Focus Fox, how big is -- are those 2 items in terms of [indiscernible] roughly?

Well, we don't guide by program, and I'm not going to give you specifics, but I will confirm there will be another decrement in the Defense Health Program next year. And we're always looking for ways to mitigate that. We have an innovation council in the program with the customer where we're looking at other things that we can do to fill in that gap, but there will definitely be a reduction on the Defense Health Program in '24, but -- yes, we have -- we're not guiding '24 right now...

No, Right, right. So another issue that's come up is inflation and wage hikes. So how large, on average, is your wage hike likely to be in '23? And I just discovered, I guess I should have known this, that most of your competitors, like it's in the first quarter or the fourth quarter that they implement the wage hike. So you kind of get a stair step. When do you basically put it into effect and mostly how big ?

We increased wages in kind of 2 ways. We have our annual cycle where we have a budget, we go through performance evaluations. That number is north of 4%, which is relatively consistent with what we have seen across the industry. And then we do out-of-cycle adjustments around special people and special skills. So depending upon what's going on in a program, what's going on in a specific market area, we might do an adjustment for a group of people. And -- you mentioned or what were you talking about -- okay, people in the intelligence community with certain clearances, certain special skills that are hard to recruit. And then there's the new people coming in. What does it take to hire someone from a college and university, right? That's not in our annual budget. But we may find, at times, we have to pay more to replace a person who has retired. And so there's some inflationary process there.

So what you're saying is it's basically not just all in the first quarter. It's kind of -- it's...

No, I think it's always continuous. And I think everyone in the industry has the same problem. We hire people throughout the year. We certainly -- we hired over 11,000 people last year. And when you hire somebody new, you're paying market and sometimes there's -- with the existing workforce, there's a lag before you can get them to market. And so we're just -- we're dealing with those staffing trends like everybody.

Got it. So on your October 21 Investor Day, you indicated '22 to '24 organic growth of 5% to 6%. It looks like, organically, you're going to be short this year if -- I mean, you're talking 2% to 5% all-in. Can you still get to the 5% to 6%? And the one thing that I asked is in '21, that was before Ukraine, that was before relations with China taking another downward dip. So how come the number isn't better than 5% to 6%?

Yes. So the kind of 2 things there, is, first of all, it's a long-term guide. And it's meant to be long term, not something we're going to go adjust quarter-to-quarter or even year-to-year. But if we didn't see a way forward to meet our long-term guide, we would change it. So -- but it's something that we really don't want to be in the process of changing, trying to follow trends. But when you speak to the guide that we put out yesterday, that was Valentine's Day too, a lot has happened in the last 24 hours. We're at the beginning of the year. We're very -- always very thoughtful about what we put out as our guide. We -- a lot of uncertainty if we want to talk about budget and debt ceiling and things. So we try to be very thoughtful when we put our guide out. And then our job is to beat that number. And there's a lot of opportunity, we think, to do better than the midpoint of our guide and be it, if you will, at the top of the range. And maybe if we get really lucky, we win the lander program, we could be above the range. And then it also speaks to the enthusiasm that we look to in '24. And that we expect '24 to be as strong, if not stronger, from a top line growth standpoint. Note, I will just spend a minute and talk about -- we had a 7% increase in the Defense budget last year. We've added 10% this year. There is a huge unobligated balance on Ukraine supplementals. And I know a lot of -- I've had a lot of questions today, and I know others have, is, okay, well, why aren't we at 10% if the Defense budget is at 10%? Our experience has been they don't always spend their money. They have unobligated balances. There's a lot of discussion between McCarthy and the budget hawks about rescinding unobligated balances. And so whether that 10% that was in the Omnibus actually makes its way completely non-adjusted through the [ PBBS ] process into the hands of contractors is yet to be seen. It's a great number. It's a great print. But to say, well, the budget went up 10%, so our Defense segment should be up 10%, as you know well, that's not really the way this system works. But it does create enthusiasm for us around topline growth. And that's why we still feel that the long-term guide that we have out there is appropriate.

Got it. And -- so -- but -- yes, I guess mine was -- '21 was before we saw the Ukraine, which has created incremental guide and was before weather balloons and further downtick in our relations with China.

Cai, on Ukraine, just to touch on that, and shooting down weather balloons, we don't make sidewinder missiles. We don't make Javelin and Stingers. And I think there's upside potential for us in Ukraine if the administration and the Pentagon decide to change the mix of support in Ukraine. Right now, they're buying essentially inventory armaments and things that we don't really -- we don't make ourselves. We are doing what we've said -- our Ukraine-plus is about $25 million a quarter. That's mostly in ISR areas and the Intel group, it's not a big number. But if the administration would decide, if you will, like they did in Afghanistan, where we had literally 300 people on the ground in Afghanistan doing direct support of the Afghan Air Force, if they move to that posture, then there could be a lot more for us in these Ukraine supplementals. They have yet to decide that. Those are policy decisions made by the administration. We would be willing to provide some level of support. We can do infrastructure support. We could help to rebuild some of the cities that have been decimated. We can obviously do aid and other things. But right now, the U.S. contractors are not on the ground in Ukraine, the way we were in Afghanistan. And frankly, we are on the ground in many countries, supporting the military, but we're not on the ground there. We are peripheral to the ground so we're in countries around Ukraine, but we're not there yet.

So adjusted EBITDA margins. This year, you're basically what, 10.3% to 10.5%, essentially flattish, with health down. And so you're getting improvement in Civil, improvement in Defense. And I assume, from what you're saying, is at this point, it looks like going into '24, Health should be kind of the same, at least on paper. Is there more room for Civil and for Defense to improve in '24, which would get you to the 10.5%, which is the potential goal.

Yes. So our long term is 10.5%. We printed a 10.4%. We guided midpoint to 10.4%. What we've said is we expect Health to come down more normative to the mid-teens, but we think Civil this year was at 10%, and we think they can repeat 10%. There's potentially some upside there depending upon how things evolve. And so the math is that the Defense segment will increase and needs to increase. And some of that is mix in the Defense segment, that's where we'll see more hardware, right? And we have talked about our hardware strategy, we're about 10% product today. We'd like to see that number move up into the 20%. And as we do that, as we have more like airborne aircraft assets, we have more higher margin business, then the margin will creep up. But we expect growth in margin in Defense '22 to '23.

No. No, I get that. But I said, if we think about '24, Health, which is a downer this year, assume it looks like it's about the same. And so if Defense and Civil continue to show any improvement, the total number would go up. Is that a reasonable expectation?

It certainly could, okay? But our guide -- our long-term guide is to get to 10.5%. And I'm not going to adjust that view today.

Okay. No, no, no -- but what you're saying is the 10.5% looks pretty good?

10.5% is certainly achievable for '24.

Got it. So cash flow this year is restrained by -- CapEx is $1.5 million, and there's some one-timer. Is this an -- it looks like this is an abnormal peak and I think your target for '24 was 100% conversion. That was before Section 174, but if we adjust for Section 174, is that still more or less where you can be?

Right. Well, so what we've always talked about is 100% cash conversion kind of on a 3-year moving average. Okay. Because in any given year, you're going to have a PACT Act. We had to repay the COVID payroll tax, which is in the [ 60 ] number. So it comes and goes. And what we -- the way we guide on cash unlike revenue and margin, we do better there, okay? So we need to set our cash guide, right, if you will, the most aggressive revenue number. And the aggressive revenue number requires working capital. And so if you do the PACT Act from an op cash standpoint, PACT Act, repay, we didn't pay last year, plus the number this year, plus the payroll tax, and you add to that the working capital, that gets you to the [ 700 ] floor that we put in today. So we -- and to get to kind of a 3-year cash conversion when you make those adjustments, it does say that we'll be much closer to our EBITDA number in '24, and we expect that. Now on free cash, we have signaled that -- because we've got a little bit more product in our mix, we see opportunities to spend maybe a little bit more than our 1%. We're going to be maybe up to 1.5% today. But I wouldn't say that's the operable number. I would say we'll be in between, maybe 1.25%. The Cabham business that we bought in Australia requires some capital investment. There is a big program in the Army called Athena-R, where we would buy 2 Bombardier Global Express 6500s and spend capital to outfit them. If that happens, that could be a use of free cash. There are other programs. There's Athena-S, which follows Athena-R, and then there could be the Hades programs. So there's some opportunities to spend some money that would lower free cash. But from a cash conversion, again, you think of it as an adjusted 3-year window, and we still see the opportunity to do that in a 3-year window that ends '24.

Got it. So we're pretty much out of time, but -- if we talk about cash deployment, I mean, obviously, first half, you can't do much. But when you get to the second half, things might loosen up next year. What's the priority? Is it pretty much stock buyback now? Or...

So first of all, remind everyone we've got some bonds that are due. We've got a term loan that's due that we took out. So we're going to look at the balance sheet. We're going to have to make moves with that. We want to pay down our debt overall. Our commitment to Moody's, who just upgraded us as we'll get to our 3x leverage. So that's really important. But even with that, we expect to have several hundred million of unallocated cash. And our commitment, we said on the call, is to return that cash to shareholders. And right now, assuming there's only 1% excise tax, stock buybacks would be preferred. If the President gets us 4%, maybe everyone in the industry will do more. Dividends or special dividends. And then I know we did an ASR last year. To do an ASR -- yes, $500 million, maybe a little bit less than that. Otherwise, it's mechanically and from a transaction cost really not a good use of our money to do an ASR. So one would expect that we would be in the market -- in open market purchases in the second half of the year.

Got it. Terrific. That was wonderful. Thank you so much.

Great. Thank you.

Well done.

See you again.