Q2 2022 KBR Inc Earnings Call
Thank you for your patience everybody today's kugel due beginning shortly.
[music].
Hello, everyone and a warm welcome to KBR, Inc. Q2, 2022 earnings conference call. My name is Melissa and I'll be your moderator.
He would like to ask a question. Following today's presentation you can do so by pressing star one on your telephone keypads I now have the pleasure of handing over twice Alison Vasquez.
This president of Investor Relations to begin Alison H E.
Thank you Melissa good day from the U K and welcome to Kbr's second quarter 2022 earnings call. Joining me are Stuart Brady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer.
Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on our investors section of our website at KBR Dot com.
This discussion includes forward looking statements, reflecting kbr's views about future events and their potential impact on performance as outlined on slide two.
These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward looking statements as discussed in our most recent Form 10-K also available on our website.
This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our presentation I will now turn the call over to Stuart.
Thanks, Alison and thank you all for joining us today.
I will start on slide five.
As you know, we always kick off with a zero harm ESG focus and today I want to spend a moment on our expanding partnership with Moura.
Placing KBR at the center of enabling our global circular plastics economy, so really exciting.
In June we committed to invest an additional $100 million.
In motor Technology, which allows us to participate more fully in this sustainably focused high growth advanced recycling sector with.
With a global pioneer of advanced plastics recycling.
<unk> mission is to enable a plastic neutral future by providing an end to end solution to convert a wide range of mixed plastic waste.
Much of which would be destined for landfill today.
Back into high quality chemical feedstocks.
Targeting 1 million tons of annual capacity in operation or development by 2025.
Our licenses, it's technology suite KBR to a global client base and is also developing its own pipeline of global operations.
Our investment builds on the alliance, we entered into last year to be mirrors exclusive technology licensing partner.
We have a very collaborative relationship. This is actually a really really great team and have already produced numerous advances in the process technology, such as loop power water recycling modulus nation as you would expect on digital operating solutions.
And together, we have already licensed approximately 170000 tons of capacity to solve the world's largest chemicals company so great momentum.
Now under an expanded partnership agreement <unk> will also be the possessed services provider for <unk> projects to support project management engineering integration et cetera, so really adding values, bringing key skill sets from KBR now.
Now just last week, but I made a big announcement with Doug to develop multiple world scale advanced recycling facilities in the U S and in Europe .
Collectively adding up to 600000 tons of capacity.
That will play an important role as a key off taker of the secular feed that mood of producers.
Now this announcement is a huge endorsement of the technology and actually represents does largest commitment to date to advance at scale.
Recycling capabilities. This is just the beginning of what KBR and Moura can accomplish together. So we're very excited by this development.
Now onto slide six.
And some key takeaways from the quarter before I get started remember in Q1, we started pretty hot we outperformed and we raised the guidance.
This was another excellent quarter for KBR, both from a delivery perspective on our future earnings potential perspective, the business is firing on all cylinders.
Why we raised guidance last quarter and again, why we continue to outperform this quarter.
Our people delivered top to bottom.
With almost 20% adjusted EBITDA growth year on year now in any market at any time this is exceptional.
And even better adjusted EPS growth of over 30% three zero percent and of course.
And of course, and really importantly, cash generation and conversion was a highlight and was again.
Ken Bang on.
Now there were puts and takes as you would expect through the quarter and Mark will give you some details on these.
Standing result, all around.
As expected bookings in Q2, we are absolutely terrific across both Ges and STS.
Culminating in a good book to Bill of two <unk>, One X a great performance now I'll cover some of the key awards in a moment, but at a very high level. We continue to win the right work with the associated earnings profile to support our long term targets and importantly.
Our margin expansion expectations.
Our growing book of business underpins these targets and we have built upon this position again this quarter.
As you'll see later margin performance was at or above expectation across all areas of business are really terrific effort by the team.
This was helped a little bit by some early contract resolutions and asset sales that mark will discuss in some detail.
But even without these margins were excellent.
Also in the quarter, we continued to reshape the portfolio.
We divested a couple of non core investments and then took that cash and invested in the circular economy in a meaningful meaningful way via mirror and added key digital transformation skills on customers with the <unk> acquisition in the U K, which we will touch on shortly.
Now onto slide seven.
The outlook for government solutions has been remains and is arguably increasingly positive for KBR.
But to touch on briefly the proposed full year 2023 defense budgets early days.
But the President's proposed budget represents a 6% increase over 2002 levels on the house and Senate have each approved incremental increases of $37 billion and $45 billion respectfully.
It's too soon to tell where this at all land, but I think all signs pointing north.
Now while the budget process remains and it's fairly early stages. We are encouraged by sizeable increases in areas with KBR is that scale across defense modernization RG <unk> space of course, Intel cyber and of course low cap given the continued.
Activities in Europe .
The cadence of awards in the U S and internationally accelerated through Q2 and I think this is reflected in our overall book to bill, but we expect that pace to continue and to be continued to be elevated through September .
Towards the end of the U S government's fiscal year as you are aware.
Now you will have seen increased commitments from the U S. But importantly also from NATO in relation to support in Ukraine across a wide range of activities.
<unk> are not only supports the U S and Europe , but has historically supported both UK and NATO and we're starting to see the beginnings of task orders in this area.
And it's too early to tell whether this will go but clearly we are positioned to serve near and longer term missions.
As highlighted on the slide the strong bookings performance means GFS now has almost 90, 595% of the work it requires to deliver its 2022 numbers and of course, a very overall healthy backlog.
We've highlighted some contract wins this quarter on the right to showcase <unk> Dev ops and other high end capabilities.
Awards across our defense and Intel business really really picked up pace via contract vehicle up vehicles like Mark that we've talked about previously this quarter.
Strategy to expand services to new clients and increased contract ceilings is playing out across the portfolio.
We are really really great result by this astute capture team.
As you know we've already talked about this a little bit before we won our largest recompete of the year, which was for NASA. This is the ground systems on mission operations contract that got out.
And this was a nice separately at the end of Q1, but went into bookings. This quarter. Now. This is a five year contract worth up to $640 million.
Now I'd like to spend more.
On the next Gen X Eva spaceship program for human missions to Mars quite cool.
This is a 10 year $3 5 billion <unk> contract.
One by KBR as part of the axiom space team and is a great example of large commercial like contracting mechanisms coming out of an asset today and kbr's ability to contribute and the increasing convergence of government and commercial collaborations and the space domain. So I think.
Really really playing on our strengths now this program will leverage innovative commercial applications for data on technologies and in time transition into something that looks like a space suit as a service model with NASA as a key customer.
This new approach to spacewalk services encourages and imagine commercial market for a range of customers and also grants NASA has the right to use the same technologies on future exploration program procurement so quite ingenious.
Today, we provide maintenance and support to NASA for its ongoing operational space suit program.
We will continue to perform that work so over the next several years weightings under the new spaceship program will be incremental.
Our first task orders to be to be competed include development of the first demonstration outside the space station in <unk> and for the Artemis lunar landing, so really really exciting stuff.
Now onto slide eight.
We want to spend a bit of time, showcasing our expanding <unk> international footprint and as I've said before we believe this part of our business is typically under appreciated but we do think it's a clear differentiator. So we want to give it a bit of air time today I mean, some key data points, we now.
A really diverse workforce of circa 5000 people across 35 different locations with annual revenues of over $1 billion.
This is a very very high end workforce that has been built both organically and acquisitive Lee kind of similar to our U S transformation.
The timeline on the slide shows the quality of assets and people that have come into KBR over this period.
Our capabilities in this portfolio include strategic Advisory high end consulting digital transformation systems Engineering security and resilience data science renewable energy and much more.
The business has a very very healthy CAGR at 10% as shown here and very very attractive EBITDA margins in the teens and it's been performing at that level for a quite quite a time.
To reflect the differentiation and the importance of <unk> International.
Actually strengthened our executive team by bringing on Paul Kahn, Paul recently joined our executive ranks and reports to me as we look to further grow and strengthen this part of the business. Paul has a great depth of leadership and executive credentials previously worked for <unk>. He was the CEO of Airbus.
Okay, and your senior executive I call them, so call them. So I'm very excited to welcome Paul to the team and I think it reinforces our commitment to international.
To come on this with the with obviously, the addition of Bema and.
Increased alignment between the U K, the U S and Australia, and I think August would be a good example of that and Thats. A program. We are already engaged on Viet Frazer Nash so good things coming there so onto slide nine.
With the Covid restrictions are lifted.
In many many countries are recently.
It went to the middle East and got back recently.
And obviously I've been visiting other customers are long term IOC and sort of top chemical customers and I'm, absolutely enthused about the STS STS market outlook more than ever.
On our delivery performance, there and thus our reputation has been really really strong.
Now at the forefront of our clients thinking.
Things like.
And this will not be a surprise energy security, obviously heightened by the Russia, Ukraine Guar gas.
Gas and ammonia is a transition a transition fuel, particularly for energy.
A lot of investment and a lot of talk about future investment in hydrogen both blue and green.
And of course opportunities in the secular economy.
Now all of these priorities in a backdrop backdrop to the long term supply demand imbalance driving investment decisions right now.
The demand for our high end services.
Carbonization capability and our technology portfolio are continually increasing and have been in truth for some time now you may recall, our book to Bill in Q1 was strong it was actually even stronger this quarter.
STS now has circa 85% of its under contract for 2022.
Very very healthy overall backlog indeed.
There are some key awards highlighted in the right hand side.
Awards in Green ammonia and contracts like the shut in these project demonstrate continued momentum in sustainability and energy transition.
Importantly, decarbonization of existing assets and we've talked about that for some time.
Venture Global announced.
On the Plaquemines project essentially this is a copy of the Calcasieu pass project, which is now producing LNG and our role here is engineering project management integration and commissioning support over the next three or four years.
<unk> is fully aligned with our stated risk profile. So no change there we have a partner a partner a really good partner called Zachry, who is the majority partner in a joint venture and they have construction responsibility.
And the client itself as furnishing many pieces of the key equipment, including the liquefaction modules.
<unk> of other packages.
As a minority partner in this joint venture our profit will come through equity and earnings.
Now onto slide 10, and some thoughts on STS is an important KBR margin accelerator.
STS really really is all about earnings growth and margin expansion.
And I think with Vg coming into the mix with a sizable equity and earning story that storyline is even more prominent going forward.
You will recall that we restructured this business in 2020 during COVID-19.
<unk> exiting all lump sum EPC projects on Commoditized services, and we did just that.
In 2021, and it seems like a short time ago, Yes, just in 'twenty, one we redoubled our strategy around sustainability as the business is foundation.
Formerly reorganizing into sustainable technology solutions.
Set a very bold course to double this business is EBITDA to 300 million plus $5 2025.
Understandably. This was initially met with some degree of skepticism from investors.
I think you can also see that this team is absolutely delivered.
Now STS is on course to generate circa $200 million of EBITDA. This year and that represents almost 30% three zero percent of KBR the annual profit.
So it's a real real set a solid piece of our story.
And it posted book to Bill of one eight X over the last 12 months.
It is on track, it's actually in truth ahead of pace to deliver upper teens and into low twenty's margins.
And it continues to operate importantly, with.
With negative.
With strong end markets that are actually getting stronger this business is set up to deliver what counts.
Most.
Earnings growth and cash and I couldnt be more pleased with the evolution of this business and its accelerating earnings and margin profile. So really really exciting times ahead for Sts.
Now I will handover to Marc Marc.
Great. Thank you Stuart I'll pick up on slide 12 for highlights of the consolidated results for the quarter and then I'll hit the segments after that.
As Stuart said the team really delivered a successful Q2 on all fronts, including playing an important role in critical areas like National Security space Energy security and energy transition.
Types of solutions all around the world.
These roles do enable our clients to advance.
Their impact on these fronts, but those in turn motivate our employees and the fact, they do things that really matter in the world scheme and our team of teams culture.
In Q2 consolidated revenues were up 5% to just over $1 6 billion.
Adjusted EBITDA came in at $186 million.
Up by a healthy 19% over last year.
This reflected excellent core margins in both businesses.
We also had some goodies flowing through the P&L this quarter, which was also the case actually in Q2 of last year. So I'll cover more of that in a moment.
Adjusted earnings per share was up 31% over last year building on the EBITDA growth plus a favorable year over year taxes foreign exchange and contained interest expense.
Hedging actions benefited FX and interest results and hats off to our treasurer and Hitachi on that one.
On the tax side, we had a discrete tax charge last year that did not recur this year.
Taxes. This year in Q2 were normative at about 25%.
As Stuart mentioned upfront, we announced the $100 million investment commitment from Europe .
Which would increase our aggregate ownership percentage to roughly 18%.
We funded $60 million of this commitment.
In June of this year.
As a result in Q2, we stepped up our original 5% investment made back in 2021 to its current market fair market value with a $16 million unrealized gain.
System with past practice, we have adjusted this noncash gain out of our adjusted EPS, but it is indeed, an excellent reflection of the quality and value that we and other strategic blue chip investors have ascribed to mirror.
Operating and free cash flow numbers in the quarter were really good and up from last year $125 million and $112 million respectively.
First half op cash flow of over $200 million puts us well on pace for the full year guide.
Deployable free cash, which is free cash flow plus the proceeds from the sub contractor settlement and the sale of a couple of non core assets was terrific at $344 million in Q2, which obviously boost our capital deployment optionality.
On to slide 13, and more on our two operating segments.
Government growth was 7% in the quarter.
The driver here was readiness and Sustainment with good on track good on contract growth and increased activity with the European command.
The Allied response to the conflict in that area suggests this may be a busy area for us for quite some time.
But it is difficult to predict.
Even with some tough ethics headwinds international performed well on both the top and bottom line with our Australia business continuing to post group, leading organic growth and Frazer Nash performing nicely as well.
Defense, and Intel and science and space were flattish on the topline with timing delays this year and elevated material buys in 2021.
But came through this quarter with higher margins and profit dollars on better mix and execution.
And in fact, all four areas within the government business improved profit dollar contribution year over year marvelous.
As Stuart mentioned, we monetize certain investments and the government business in the quarter for $40 million in cash and recognized a $22 million gain on asset sales.
<unk> reported EBITDA margins by about 165 basis points.
Importantly, excluding these asset gains the margins in Ges were right in line with our targets of 10%.
Now onto STS This business as Stuart said is very busy right now and growing in higher margin areas as our strategy set out to do.
The pivot away from Russia, and timing of projects has us a little behind the planned topline number but.
But we still produce sequential growth of almost 20%.
As Stuart highlighted STS profit delivery was outstanding in Q2 and the outlook for the second half is also excellent.
Our solutions in the energy transition are benefiting from efforts to move toward a greener future.
And our further fueled by strong energy prices energy security investments and the supply constraints, we're seeing stemming from the Russia, Ukraine conflict.
In addition energy transition is now taking hold with our government customers. Hopefully you saw some of this in our press releases earlier this quarter.
STS EBITDA contribution in Q2 was excellent at $55 million.
With 18% margins.
STS benefited this quarter from a couple of items, we pulled forward to Q2, but net of these items margin still exceeded 16%.
The margin expansion in the core business is directly attributable to the accelerated growth in the higher margin areas of this business.
As Stuart mentioned earlier, we are ahead of pace to achieve our targeted upper teens plus margin profile.
On to slide.
14.
Net leverage now stands at one nine ex benefiting from growth in EBITDA strong cash flows in Q2 debt reductions, which have helped offset the effect of rising interest rates.
Interest rate swaps, we previously put in place under more favorable rate conditions are also really helping in this regard.
This quarter, our treasury was boosted by the first tranche of recoveries from the resolution of the active subcontractor matter.
Proceeds of roughly $190 million plus another $40 million from asset sales.
Deployments in Q2 were about $200 million, we had about $60 million for the first tranche of the mirror investment, we had about $100 million in debt reduction and about $40 million in stock buybacks.
We closed on the Vina acquisition earlier today, so that will obviously be a Q3 event and deployment.
Our capital deployment priorities have not changed but I'd like to emphasize we plan to be conservative with capital given the economic and interest rate environment.
On to guidance on slide 15.
We are affirming our current guidance for fiscal 'twenty two based on strong first half results across the board and.
And overall healthy market conditions.
We did have particularly good mix in Q2 and accelerated a handful of Closeouts and benefits. This quarter that were originally expected in the second half.
With 90% of our work under contract to deliver the rest of 'twenty. Two we feel good about our full year guidance of course, and we will continue to revisit as we progress through the rest of the year.
That covers it for me back to Stuart.
Thanks, Mark nicely done.
Now to summarize.
I think we can all agree we've closed out the first half of 'twenty two with a back.
Double digit growth in both adjusted EBITDA and adjusted EPS in the quarter.
Bookings were absolutely excellent and we are continuing to win work that will support an deliver our long term targets and of course margin expansion.
Really excited about the trajectory of GFS and the STS business the market outlook across the portfolio remains robust and the associated pipeline of opportunities are attractive and aligned with a positive outlook.
The acquisition of Lima, additional investment and Moura debt reduction return of capital to shareholders, we continue to deploy capital and our strategic balanced manner. As we said we would do so.
Doing what we said we would do.
We have talked today, a lot about EBITDA and EPS and rightfully. So KBR is in EBITDA and EPS growth story with strong margins and excellent proven cash conversion.
With increasing contribution via equity and earnings in STS The Gs international growth with higher margins and hence earnings.
And then when we layer on home safe later, this year, but we will fully consolidate but with a 72% share.
Overall revenue will not really tell you the whole story.
Thus going forward, we will be talking a lot more about EBITDA and EPS and of course cash.
With work under contract of over 90% for full year 2022, we're really looking ahead now to winning the right work for 'twenty three and of course 24 to help secure our long term targets all in all another fantastic quarter building momentum on the path to <unk>.
25.
Thank you for listing and I will now hand, it back to Melissa we will open the call for questions.
Thank you Janet if you would like to ask a question. We invite you to press star followed by one on your telephone keypad.
Your mind also that your question has already been answered you can press star followed by two to withdraw your question. Please limit your questions to one question one follow up.
To ensure that you are on mute you'd likely when preparing to ask your question, we will pause briefly to allow for questions to be registered.
Our first question today comes from Jerry Revich of Goldman Sachs.
Jamie Please go ahead.
Hi, This is Adam <unk> on for Jerry today.
My first question is on the $1 5 billion LNG Award.
<unk> that <unk> were all in the joint venture will provide services outside of construction and that its modular design, but we have seen many recent LNG projects that have been over budget.
So can you just help us build comfort with the risk factors at the JV is responsible for is it labor productivity labor cost and under what scenarios is the profitability of the JV at risk.
So we feel really good about the risk profile I mean, it's a very very good question and one we of course expected under this <unk>.
Yes.
I mean, this is not a lump sum project theres no lump sum construction.
<unk>.
It very much fits with our stated risk profile that commercial model itself is.
The customer feels as IP around that and the way that they bring to market, but by remember as I said there is no lump sum construction in this.
The services itself did not constitute lump sum risk and remember the customer itself is providing the liquefaction modules.
The LNG tanks, the pre treatment.
So a lot of that typical process risk gutsy sits with them and their vendors in that area.
We're playing in integration role.
The typical risks that comes with your LNG type project doesn't exist for us in this construct so it's a very unique commercial model I think you should take comfort stated comments that it does not change kbr's risk profile of the lump sum EPC business.
Out of taking construction risk.
In that context.
And of course, with obviously not responsible for the construction. So hopefully that gives you enough comfort around that risk model. It also comes through equity and earnings for us.
And I would say that the numbers themselves are already on the most conservative side built into our long range targets.
That's great and can you just update us on how youre thinking about the revenue burn cadence in government solutions from here.
Okay.
Sure Mark here.
We went through the details relative to the components this quarter.
We have built quite a pipeline of outstanding awards. So we are hoping to see some of that decided in our favor as we get through the rest of the year.
That will have probably a minor impact this year.
But hopefully a very favorable impact next year, we've got very good visibility in the business. We have it is.
Flat to modest growth overall for the rest of the year quarter over quarter.
Of course, extracting out the effects of <unk> last year. So we have seen some delays we've seen not a lot of students coming out we were pleased with the book to Bill in Q2 for sure.
It gets the biggest recompete out of the way and so we are winning our fair share peso decisions could be better but.
We're actually bullish on the long term outlook and are comfortable with our long term targets.
Great. Thanks.
Just to pile on there I think we talked a little bit about this as we went through the.
Prepared remarks, obviously the work coming through you Com, we feel thats very positive and obviously, we've seen that coming through growth in that segment.
Although as Mark said, it's difficult to predict I think the cadence of that walk through the course of the rest of this year, we don't expect to change too much and I think there's probably more opportunity given the commitment from the U S and NATO as we move into next year.
Alright, thank you.
Thank you Adam Thank you Gerry.
Our next question comes from Sean Eastman of Keybanc capital markets, Sean AVG.
Hi, James Thanks for taking my question.
So I just wanted to first question is just sort of clarification.
And then tech 2022 guidance after.
Honestly, some very strong outperformance at the segment level in the second quarter.
So it would be helpful to frame how some of these pickups in the second quarter were contemplated in the full year previously.
Haps, whether theres any negative offsets underneath that FX for example, just to assess.
The underlying update on the full year.
Joyce.
I mean, Sean again, a very good question.
I think the easiest way to answer. This is we have an absolutely outstanding first half of the year.
Raised guidance in Q1, we.
We are conservative in.
In nature as you know, we're just came through a very strong Q2.
Mark who is probably more conservative than I actually said, we would revisit our guidance if we continue to perform well.
Through the rest of the year. So I think this is more a question on <unk>.
Making sure we've got.
<unk> performance in Q3, and I think if that comes through I think.
It will certainly be re looking at guidance in a positive way.
So.
There is no guarantee of that of course, but I think the trajectory would tell you that that is probably.
Something we should be looking at very carefully.
Okay interesting comment thanks for that Stuart and then and then coming back to the the plaque of Mines Award.
Obviously quite large and considering its going to flow through equity earnings.
It'd be helpful to get a little bit of idea on how to model that line on a go forward in terms of quarterly run rate and.
Also theres going to be no revenue here I would assume a contract of this size would have an impact on that.
The go forward STS margin target, maybe it changes the arithmetic there so any color around that would be helpful as well.
Yes.
I mean.
I mean I think our.
Guided on a growth in EBITDA over time for STS is.
20% plus on our margin expansion has room in it to go above the high teens into the low <unk> and I think.
Are these consider that so I think we need to get.
A bit more time under our belt, Sean to come back and answer that fully.
But I think if you if.
We look to any business with underlying EPS growth that we've laid out.
If there's any skepticism around hopefully some of that skepticism disappears with Dan.
Instruments today and also the skepticism of margin expansion et cetera also hopefully some of that skepticism disappears. Today also so so we will come back over time, but that's probably the best way to answer it today.
Okay. Thanks, I'll turn it over there.
Yes.
Thank you for your question Sean Our next question today comes from Brent Thielman of D.
Davidson Brent <unk>.
Hey, Thank you maybe just one more on the LNG opportunities just wondering if there are sort of similar sized prospects out there that sort of scope.
Stuart if this sort of risk profile that youre out there pursuing could get involved in.
Yes.
To be honest I think they are probably few and far between in terms of the commercial model here.
I think the way that <unk> has done this is quite unique in the marketplace.
Has proven successful of course on Calcasieu pass, which I think Derisk This project considerably.
But that aside.
I think that there is a proposed phase III in <unk> and we'll see if that comes to fruition in the next little while at the suddenly a lot of announcements by BG on LNG sales.
And they've got a number of other prospects within their portfolio that they are trying to progress.
And if we.
We perform and things go well then you would think it would be for a shot with that but but outside of that today I'm not I'm not we're not targeting getting back into the LNG EPC business in any way shape or form on that lump sum basis.
We will do some project management work in fact, we're doing some project management work today in the Middle East.
Around the LNG development on.
A reimbursable basis.
We will continue to look at those but our rules will not going forward.
Very different to what they were in the past and I do think that the.
Commercial models that make this successful or not being adopted by others, maybe they will if we see this going really well.
I wouldn't count on it.
Okay I appreciate that Stuart.
And then I was interested just didn't focus on the international portion of the GFS segment, obviously, a lot of room to build on what you've done and as you would call out relatively sort of attractive margin to the overall segment.
What's your view of the long term organic growth potential of this piece of the business and sort of ability to penetrate new program on the international front with with what you have today.
Our CAGR has historically had been 10% I think we'd expect that trajectory to continue in.
We will realize we believe some some synergies across <unk> and <unk> as they come in and we actually integrate in a way that is united to the marketplace.
And also I think there's just a stronger connection between the U S and Australia and the U S and the UK and in all three and five I think plays well to set a strong footprint in all three jurisdictions. So I think you'll start you'll continue to see really really outperforming growth in some of these markets.
And.
Of course, it's becoming an increasingly.
An important part of our portfolio of well over $1 billion.
<unk>.
Margin expectations at that level, we will continue to be.
Extremely attractive so I think thats why we wanted to highlight to you it's become really material part of our business. We tried to give you the transformation color. That's taken place there that to similar to the U S and going up market.
Greater differentiation.
And the returns are actually.
Typically more attractive in the U S market. So so it gives us a great piece of differentiation in that and that sort of margin enhancement story.
Very good thank you.
Thank you Brent our next question today comes from Andrew Kaplowitz.
Citigroup.
Please go ahead.
Hey, good morning, guys.
Randy on A&D.
So it doesn't seem like an issue.
But can you talk about how tight global supply chain and labor markets. I think KBR have you seen any cost creep, adding your margin and or have any project has been slower than expected to move forward given supply chain or labor issues.
I mean, I'm not really I mean were typically our services business as you know, we're we're not really I mean.
From an inflationary point of view, we did a mid year review across the business in terms of salaries and things and that's all built into the numbers today.
I think our retention and recruitment and numbers are left.
Leveling up somewhat and so recruitment is keeping up pace.
Even so a ton there was probably a bit higher than it was.
A year ago.
Address that so and.
We are provider of labor typically so we're not seeing any real impact of the supply chain piece.
On what we do.
So.
And I think the other questions really around FX and interest rates I think mark address them, I think treasury and Mark and the team have done a terrific job of actually mitigating those risks.
The international businesses continued to outperform which also helps of course, so so I think perhaps others are feeling greater headwinds in those areas than ourselves.
Thank you.
Encourages us to be very positive on this call with the output.
Got it and then just following up I know you said STS as I'm trying to achieve $200 million EBITDA can you give us more color into what youre seeing in the business. It seems like cyclically. Secondly, you should have a nice tailwind, but I think you were flattish in the or a little bit behind in that double digit revenue growth. So what are you seeing in then.
Maybe any initial views on the inflation reduction act and what it could mean for KBR.
Yes, I mean, obviously I think answering a lot of fast I think obviously.
Quite strong tailwind is into the market in the U S. We have not done the full assessment of that but I think again as we said at all points north.
A lot of effort and effort.
What sort of dollars targeted energy security and climate changes.
All aware so.
Not only plays plays into key skill set so it really does.
And in terms of what we're seeing across the board you've got.
Annual season, IOC that probably modeled on oil price and the original budgets.
So hopefully that's at today. So these are incremental dollars are all dropped to the bottom line really and so we're seeing a very cash rich client base that wants to continue to address I guess, the energy security issue in the supply demand imbalance and they want to gain market share.
And so investment is when I'll, let runs have been leased investment commitments from companies like <unk> and <unk> knock et cetera Rms.
And they really contain a strong hydrogen components are real.
Im not building crude oil for energy and transitioning away from that and then taking crude and turning it into chemicals et cetera. So a lot of aligning with our technology portfolio a lot of cash being put to work a lot of market share the others will try to defend and Theyre also cashed cashed up if you like so I think we'll start to see.
Increased investment across the board and in truth Theres been under investment in this sector for quite a few years now as youre well aware so.
You've obviously got refiners, making margins that they've never made before so really that set of sweating that asset and making sure. The technology is the future and this I guess optionality again plays to our capability.
And then you've got the chemicals companies similarly, looking at expanding particularly around olefins and <unk>.
Looking at how are they how are they actually expand that marketplace with demand very well.
Strong.
Then you layer and of course, the whole set of hydrogen future in the Blue and Green hydrogen is very much on everyone's shopping list and.
Of course, you can see the book to Bill of our of our technology in STS businesses. As a consequence is very very strong. So it's almost a perfect storm.
And not only from a demand cycle, but actually the ability to pay for projects.
We're seeing that across the board in those because they're <unk> to this that we haven't seen for a number.
<unk> of years and so we're seeing.
A lot of uptick in opportunity set across that business such as wire was very upbeat about it.
In my prepared remarks and.
And probably less conservative in my normal self around data.
Is it a similar market and I think they award of BG as well really sort of shows the energy security piece.
<unk> already announced sales of LNG, the first company to do so to Germany.
So there's probably more to come and not cycle. So so I think that certainly gives us a very strong medium term outlook.
Not one year.
A number of years.
I appreciate all the color.
Thank you Andy on next question today comes from Jamie Cook of Credit Suisse. Jamie. Please go ahead.
Hey, good morning.
I guess two questions. One is I think about you guys today versus.
Two years ago five years ago.
Model and the portfolio loan portfolio is obviously a lot different lots of concerns out there.
A recession.
In the U S and Europe , but can you talk about how you think about the earnings resilience of KBR. If we do go into recession, just given some of the visibility. The backlog you have you think there still is opportunity to grow your earnings that Youre thinking about the next sort of 12 to 18 months and then my second question Mark I just.
Update obviously the cash flow in the quarter are strong the balance sheet in a good position, we're doing sort of niche and.
Sort of a niche acquisition.
How are you thinking about your capital allocation priorities any larger.
M&A opportunity. Thank you.
Thanks, Jamie I mean, obviously as we look at our strategic planning not just this year, but every single year, we look at the resiliency of our earnings portfolio.
Whether that touch a political geopolitical or economic.
We've positioned the business for the <unk>.
<unk> very nicely and that is that we will continue to be funded.
And what can be continued continue to be funded through really any disturbances that I mentioned earlier I mean, if you think about energy security that issue is not going away.
Think about the resiliency of moving the agenda from a climate change perspective, and the commitments that are already being undertaken a multiyear commitments.
LNG being the Vg thing being a perfect example, one year is a three four year program.
So I think the resiliency around that portfolio is very very strong and then when you tend to look at government I mean remember we talk about KBR being very differentiated because of the length of tenure of our contract portfolio.
And this is the time, where people people need to actually think about that and understand why we've done what we've done and really the resiliency around that and the length of tenure not for one year I think the average tenure of 10 years.
Contracts portfolio is extremely extremely important at providing I think our shareholders and our people with confidence around the resiliency of the business.
Top that off I think we've actually positioned the business in areas that will continue I mean, the threats of near peer threats of Russia, and China are not going away, regardless of any any recession or potential recession, and therefore, I think and continued investments in the area as I discussed in my prepared remarks, we will continue.
So I think where we're very very well positioned to be resilient through any potential recession.
And I think we've done that very purposely and I think we've been very thoughtful around that and try to articulate that on a number of occasions to the market and hopefully that resonate and mark. The second question, Yes, Jamie good. Good morning to you look we have a great balance sheet today, we worked very hard to achieve that and we want to keep it there.
Wei.
We are in a situation, where we're not sure where the interest rates are going and the magnitude of that and we don't want to be overly speculative either so I did say earlier that we tend to be cautious in deploying capital we intend to continue to be balanced.
We obviously just did FEMA. This morning that was done at an attractive valuation I think we would continue to be constructive for modest sized acquisitions at attractive valuations, but we also have a view there might be better pricing later in.
In the event of a recession and we'd like to have some dry powder available for that so with respect to that will be more cautious unusual on the M&A front.
I mean, it's interesting with these bolt ons, Jamie we call them bolt ons, but they're actually very strategic for us.
Digital transformation is obviously, a key theme running through much of what we do.
The multiple we paid for that business was circa 10 times.
Got it.
It's a business that's.
This growing.
Mid teens, CAGR and with margins in the high teens and low twenties.
Put that in context of what you can achieve in the wider market today, that's a really really attractive deal and and marked right I think the heat will come out in this market a little bit some people who are over levered may get themselves in trouble with higher interest rate.
And may not be as resilient to a recession.
It would be nice to be able to to pilots. If you like when the time is right.
Perhaps a little bit more affordable affordable in the U S.
In the broader context more sizeable for example, so so that's kind of that's kind of where our thinking is today.
Appreciate the color thanks, a lot.
Thank you Jamie our next question today comes from Tobey Sommer of curious Securities JV.
Yes.
Thank you.
We think of the space domain for the company.
Exposure NASA military until how does the growth there compare today versus the overall GFS segment.
What's the relative growth outlook compared to the GFS segment on a go forward basis.
Yes, I mean, it's a good question Tobey and lots of lots of discussion and a lot of excitement about space across obviously, the <unk> side with the increase in budget and the commitment to go to the Moon and beyond.
You see the changing.
Contractual structures coming through Nossa with this greater commercialization.
Sort of symbiotic relationship if you can get it right between government and commercial.
And then you start to look at obviously the broader commercial space implications in that it's a growing part of our portfolio.
And then of course, the military space and Intel space side, which of course has got a far greater level of investment in it today than it's ever had but what is I guess that comes through obviously DNI segment.
And.
And we're seeing very good pickup in awards across that business in Q2 as the.
Those contract vehicles like Mark some things, obviously do that through their stuff.
A slow as NASA Award did.
Did pick up our gizmo Recompete for chassis was quite quick, but we have multiple billion dollar awards.
Arena.
And I think.
As a consequence of that our revenue profile has been fairly flat this year year on year and science and space.
Our performance has been terrific. So the margins are up which is which is exactly what we want and so I think anything we win having won a recompete and I think we get between now and next year will actually increase the cadence of growth across that segment, but the timing is difficult to predict.
Thats the key piece of this.
But we are pretty confident when you roll in the whole space piece, the DNI piece and of course, what we're doing in readiness and Sustainment.
And importantly, tsi and.
Arsenal around our overall growth targets are achievable and GFS through to 2025.
Thank you and my follow up is are you investing.
To grow your bid and proposal teams in the government solutions area to prosecute what inflow for.
For free.
And if so what what level.
And those teams or investments are you.
Yeah.
Toby Mark here, Yes, we are increasing it to a modest degree it does ebb and flow with specific bids and proposals as you would expect to some degree but we've built a good team.
When you make acquisitions you tend to take the best and brightest out of all of them and combine them and go after things you Couldnt go after before.
I think we've done that well I still think we're in early innings on that and as we go up the food chain and up in scale. It will require more investments. So we have that baked into our long term plan.
Organic growth is the best type of growth, obviously, and so those types of investments often pay off and that is definitely in our sites to make sure we leverage that as much as we can.
Okay.
Thank you.
Thank you Toby on next question comes from the line of Gautam Khanna of Cowen Gautam FTA.
Hi, good morning, guys.
Cost of them.
Was wondering if you could update us on two things one.
The timing and sort of the circumstances around.
The home States Alliance win and.
If thats still on track for an October resolution.
So you can say there and secondly.
In the past you've talked about.
The Europe com.
Business seen about $100 million of task orders related to that.
Escalation, Russia, Ukraine I was wondering if you could update us on.
What that might look like this year and next in terms of revenues. Thank you.
Okay. So I'll take the first one on maybe the second.
So.
The home safe.
SaaS continues to be on track, we haven't had anything that would.
Give us any concern that this is.
Not happening in the timetable related I laid out earlier in.
In October .
Youll recall, we do have.
That transition a nine month transition.
Having all that bears out.
Once we got awarded will come back and give you an update but so far no change on that.
And Gotham and the Yukon I believe your second question.
And our support relative to the UK and Russia, a fair well.
Well position there and the lockout five as you well know there is a normal activity and then there is the plus outgrowth relative to supporting those activities.
So far this year, it's up about roughly $100 million over its normal pace.
And we expect that type of pace to continue through Q3, it's a little hard to tell after that and we've been very cautious after that in our view.
Yes.
Yes.
We suspect will be there for a long time, but it is hard to say.
With looking at contracts and specific guidance from the customer so we're cautious on that front.
Thank you.
Thank you. Our next question comes from that <unk> of Stifel.
AVG.
Great. Thank you and good morning.
Hi, Bert.
Stuart Mark.
A lot of what you guys have been talking about sort of confidence on the couple of the businesses within government solutions, if I were to parse them out.
Say logcap the international government services franchise in space.
And you had to choose which would you say is going to grow faster as you approach 2025 targets.
Oh.
That's almost an impossible question to ask I think that the DNI businesses.
Fantastic organic growth if you looked at it last quarter, just just from its cadence and when things are awarded I think if things come through NASA. This year Youll see quite nice growth coming through the space business, but as I said, it's unpredictable.
Iron Ash low cap business Mark side, it's quite difficult to predict and GSI continues to perform nicely.
Yes.
Without pace sort of 10% CAGR. So I think I think the beauty is the portfolio.
And I think the confidence.
Shareholders and the market should take from that is the continued.
Performance at or above expectation and every quarter. One of these segments does a little bit better than the other.
They are all they are all performing very very well as mark said, but someone will outpace the other on a quarterly basis just to just on timing of awards resolution of award fees are contract closeouts or whatever it might be so I think at the end of the day I think that's the piece that's more important.
<unk> laid out.
I think a very.
Very realistic growth targets.
And.
Hopefully the market is getting more and more comfortable on achieving those as we as we had through each quarter. So I think that's probably the best way to answer it relevant.
It's a bit like saying who is your favorite child.
And you just don't do that right and so.
So we're not going to.
I think that ultimately the portfolio is a strength.
Fair enough and just a quick follow up thinking about the other side of the business STS if I look at the components of that business do you have the ammonia ammonia syngas, you've got recycling petrochemicals inorganic and some of the energy refining and obviously you highlighted a pretty sizable deal in the energy refining side, how should we think.
The other components clearly we're in a position right now where fertilizers in short supply, but youre not hearing a lot about capacity being built out you've highlighted mirror for the recycling side.
Just in the context of the European energy crisis, and a lot of things going on globally.
How should we think through some of the other components that get you on those growth targets.
Yes, it's a similar answer I think we our portfolio is the strength, we have 70 plus technologies.
I think we're seeing a huge amount of activity in and hopefully some.
We'll see some positive movement there in the ammonia side, we've announced a number of green and blue to ammonia. This year. There's a lot that we're bidding right now there's a lot of traction in that area and I think I think maybe youre not youre not seeing as much as maybe you expected, but certainly a huge amount of activity in our ammonia segment for us.
We're seeing a huge uptick in olefins and opportunities around olefins as I explained in my prepared remarks, and then you've got this the whole hydrogen piece coming through which again is it related to ammonia out of the blue and green cycle and the continued investment in those areas.
No.
It seems to be.
Again.
For the quarter.
Depending on the timing of a large one seems to win out over the other so we're.
Seeing all the say investment in traditional we're seeing.
Companies time to develop renewables, we're seeing refiners spending.
Cash to keep their assets and improve.
What I would say optionality in terms of moving away, particularly from transportation fuels and looking at other options there and we've got technology to help them with that so we are seeing a lot of activity.
Also in North America today than we've seen for many years.
Which is not unexpected but also across the rest of the world. So so I think it's again, it's a it's not one segment over another or one technology over the other I think it's a.
It's a portfolio of response question.
And.
We actually feel pretty bullish about things like ammonia.
So just to just to clarify.
Youre not expecting a material negative impact from what's going on in Europe or is that just something you're monitoring right now.
We do not expect a material impact with what's going on in Europe .
And other than other than an increase in demand because of energy securities.
It's a material impact on the if anything on the upside.
But we've laid that out.
<unk> already.
Thank you Stuart.
Thank you bet. Our next question comes from Nicholas of vertical research.
Okay.
Okay, Mike Dudas.
But anyway.
Yes.
If you've never heard of that when we get it.
Sure.
Larry My secret names on it.
Good afternoon, gentlemen, Alison.
Hi, Mike.
So I want to ask you to predict the winner of the UK Prime Minister <unk>, but since you're over there and you can certainly adding a lot of assets and talent to grow that part of the business out of the out of the UK.
Could you get a sense of you are given the politics that given what's going on I wouldn't assume that.
It's an opportunities very strong over there just wanted to see if you would agree.
Very much so remember, it's not a change of pace.
<unk> leadership in the Conservative party and their commitment to defense spending is clear.
And that budget has been set unlikely.
I mean, the U S does this in annual cycles, the UK does four year commitment.
Different regimes, so we're feeling very confident about that spend.
Feeling really good about the commitments of the UK and others in fact to support the war effort in Ukraine.
And.
And we've got the whole dynamic which are little bit different in the UK around Brexit what it has to be U K is to become more self sufficient.
And as a consequence of that the activity levels going on with <unk> and <unk> et cetera are heightened.
By those factors.
Okay. Thanks.
Thank you for your question, Mike will now move to our next question from Avi <unk> of UBS.
Hey, good morning, guys on for Steve Fisher.
I guess just on those NASA Award.
Being are they more sluggish now than they had been in the past.
And you also noted that theyre rather unpredictable.
I'm wondering if you could just help frame that in terms of kind of a range of timing like does that mean, a window measured in months quarters.
Possibly a few years.
Any color there it would be helpful.
Yeah. So.
I think that.
Problem is unpredictable.
<unk> got the gizmo contract, which we bid and was awarded an <unk>.
Fairly short order it was not protested and we.
And we move forward, which was terrific.
You had the master contract that we bid we won it was protested a bit again in four years later, it's now under evaluation.
And hopefully we will be awarded later this year.
And we've got some that are.
And in the machine if you like within NASA for over a year.
So just waiting for award and I think it probably relates to different centers different resources different priorities is it's tricky to talent Oscar our people. The same the same question, we don't really get.
I mean, that's just.
To answer that we got so.
Yes.
I think the <unk>.
Nice thing to take away from that is that our risk of.
Not doing what we said we do is actually very low we've won our largest recompete for the year anything we weren't as additive we won the space suit program as we discussed in my remarks.
And everything that comes through between now and the end of the year is just a pause.
Positive impact to the 23 story.
Think the performance that we are having really helps us in terms of not just margins and returns, but also position us well for Recompete, because you don't get strong award fees, unless you're doing really really well.
So I think that all plays while in.
You will see things moving.
As time progresses over the next six months till the end of the year.
Suspect the cadence of awards will pick up a little bit as well.
More people will get back from Covid and things like that.
Got it thanks for that and maybe as a follow up here.
How should we be thinking about the backlog in STS from here do.
Do you expect to be able to sustain at these levels or maybe wind it down in some of these bigger programs burn.
Yeah, I mean, I think the nice thing about announcing a $1 5 billion to also win in that arena is is that.
As your book to Bill the challenges that continue and continuing with that but but.
But I do think that the market is supporting continued momentum.
Irene I really do.
So I'm not seeing that we're going to be struggling I think the opposite I really think that the market is.
It's hot I think that our position in the market is really really strong and it is where we want to play.
We don't want to play everywhere and I think Thats key to success also so I think being focus being smart around.
What do we go after or imply in the earnings profile and cash profile of that work will continue to be front of mind. So so no I don't I don't think thats too many headwinds there.
Understood I appreciate the color. Thank you.
Thank you. This concludes the Q&A portion of today's call and I will now hand back to Stuart <unk>, President and CEO for final remarks.
Thank you I mean, I think just just a short thank you I think some some excellent questions over the over the last hour or so.
And thank you. Thank you for listening and obviously, we'll be talking to you further over the course of the next day or so thank you.
Okay.
Thank you. This concludes today's call you may now disconnect your lines.
Okay.
Okay.