Q3 2022 KBR Inc Earnings Call
[music].
Okay.
Hello, everyone and welcome to the KBR, Inc. Third quarter 2022 earnings Conference call. My name is Charlie and I'll be coordinating the call. Today, you will have the opportunity to ask a question at the end of the presentation, maybe you'd like to register your question. Please press star followed by one on your telephone keypads.
Please note that we will be taking one question and one follow up from each attendee.
Hand over to host Jamie <unk> to begin Jamie. Please go ahead.
Morning, and welcome to Kbr's third quarter 2022 earnings call first I'd like to introduce myself and Jamie debris, the new Vice President of Investor Relations for KBR, taking over from Allison has moved into a leadership role in our sustainable technology business I'm excited to be here and for the opportunity to serve you.
Joining me are Stuart <unk>, President and Chief Executive Officer, as well as 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 the 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 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 earnings presentation I will now turn the call over to Stuart.
Thank you Jamie and welcome to the KBR team. Thank you all for joining US this morning and of course and your interest in KBR.
I'd be remiss if I also didn't take the opportunity to thank Allison she's done a terrific job for us over the last few years.
We'll all have experienced or no.
She goes on to bigger and better things within KBR. So now on to slide four I have seen this slide several for several years now.
Slide depicts a zero harm program, which has 10 pillars across the ESG and sustainability spectrum now these 10 pillars and the underlying behaviors that make up the program and make it very successful are really really important to people.
Integral part of our values and of course, our culture.
We have incredible people at KBR and every year the amazing what they do in this area is captured in our sustainability report, which.
Which takes us nicely onto slide five this year's report has recently been published and is available on our website.
Some key highlights from this year's report are shown on the slide obviously not the full report, but just some key highlights I won't read them all out is pretty self explanatory, but the key takeaway is that our commitment to strong ESG performance is unwavering.
Our focus on looking after our people the environment on communities, where we live and work inclusion and diversity and being a socially responsible company with strong governance is evident.
We will do all this while delivering shareholder value.
Which I think is a clear differentiator.
Unless leads me nicely onto slide six in the quarter highlights.
Today's presentation I think will be relatively quick as Q3 was a clean quarter.
We will give you details in a moment, but in short our revenue growth ex OE GW was solid double digits with aligned earnings growth.
Execution was once again terrific <unk>.
Resulting in strong margin performance and our free cash conversion was well above one so really really strong performance.
Trailing 12 months book to Bill was one three for the whole group with once again STS outpacing.
We continued with our balanced capital deployment strategy.
Over and above the quarterly dividend, we closed on the <unk> acquisition, which is in the UK enhancing our capabilities in digital transformation.
We repurchased about $50 million of our shares in the quarter.
$125 million year to date.
As you May recall, we over performed in Q1 and raised guidance. We also exceeded in Q2 and again in Q3, both on EPS and cash and thus we will be raising guidance again today in both more on that later.
Now onto slide seven.
The market in STS has several tailwind imported long term themes that continue to be at the forefront globally.
The energy Trilemma of energy security Decarbonization, and high energy prices and affordability is a reality and the outlook is strong, especially with governments like the U S. Introducing legislation that incentivize the development of more sustainable projects in areas like.
Hydrogen, which I believe you're already aware, we are wholeheartedly involved with companies like Woodside here in the U S already.
The market conditions are reflected in the book to Bill.
And I'll just recap book to Bill in Q1 for STS was one three in Q2 was three six yes, three six on to Q3 $1 four which gives just under 219 for the trailing 12 months, our amazing performance, there and I think it really demonstrates the strength of that market and our position.
Isn't it.
Energy security was very much the same in our Q2 earnings presentation and the activity and pipeline in this area continues to be very robust.
However, this quarter, we decided to highlight the decarbonization themes and how these are translating into growing demand and backlog for KBR.
<unk> ammonia in the U S plastics recycling and Korea green ammonia with associated carbon neutrality, Norway.
The move into the technology realm and carbon capture.
Yes.
Our work under contract is solid for the year and our EBITDA and earnings momentum into <unk> 'twenty, three and beyond is very very exciting.
Now onto slide eight.
The <unk> outlook has not changed too much since last quarter.
National Security defense modernization, cyber and space superiority prioritization all areas of focus for KBR.
As new technologies and innovation are key in areas like cyber science.
Directed energy and again caveat is very well positioned as youre well aware.
Budget request in the U S and increased commitments in the UK are both positive and with the backdrop of the ongoing conflict in Ukraine, continuing on additional funding committed to support that mission.
Already strong semantics.
Our pipeline remains very very strong, albeit award timings.
Quite difficult to predict particularly in the U S.
This is reflected in our overall book to Bill.
Which is one five in Q2 and eight in Q3, so you see quite quite lumpy in terms of timing of awards I think the trailing 12 months is a much better guide which stands.
Across all of GFS.
The international business continues to perform really really well and bookings and Frazer Nash continue to be strongly aligned with UK priorities and budget increases.
The U S. Continuing resolution is not expected to have a material impact to performance given a bedrock of business on differentiation with our international portfolio.
Similar to STS the focus is on execution and our positioning for 'twenty, three and beyond given the high level.
Contract for this year.
We have highlighted some key wins from the quarter, which again reflect the market outlook comments and demonstrates I believe the enhanced capabilities and the agility required to be successful to date.
A new sizable win under.
To digitize and modernize analog systems with a modular open system architecture solution for vertical lift aircraft.
I'm, particularly excited about this win as it was hotly competed under the structure and KBR excelled on technical differentiation.
Additional highlights this quarter include our cyber and visualization win in the UK as prime.
The new space suit went to return to the Moon with axiom, we had a key technology and capability team member.
On selection of its under JV is one of five who now have a hunting license across R&D of hardware systems and software to enable scientific and technical intelligence for the National Air and Space Intelligence Center.
Absolutely incredible programs, all exciting and very much aligned with a thematic we do things that matter.
And this really really resonates with people at KBR.
I'll hand over to Mark who will take you through the numbers in more detail and of course the guidance Buck.
Great. Thank you Stuart Thanks, also and welcome to Jamie.
She is already off to a great start and a special thanks to Alison Stewart set for a job really well done.
And I think you all know that.
So really pleased with this transition.
On slide 10 for the Q3 financial performance.
As Stuart said this was a clean quarter, but performance tracking really well.
Just stepping back I think it is important to highlight that despite global instability floor in Europe high inflation foreign exchange headwinds and rising interest rates KBR delivered outstanding results across all parts of the business.
We have an incredibly resilient.
Long term portfolio enhanced by attractive contract vehicles technologies and solutions that afford near mid and long term growth opportunities.
<unk> by the important long term fanatics that Stuart mentioned, just a moment ago.
So onto the numbers revenues were up 11% over Q3 last year on an ex <unk> basis.
Reflecting organic growth in both segments.
And the new contribution from Frazer Nash and Lima, our recent acquisitions.
Margins were really strong on excellent execution and favorable mix.
Cover more of that on the next slide.
CNA and non operating items were well in check which is notable given the market conditions and foreign exchange and interest rates.
Specifically, we overcame about $6 million in P&L headwind in the government segment from the strengthening of the dollar against British pound and the Aussie dollar.
It's also important to note that while our STS business benefits from a diversified global footprint.
<unk> generated roughly 85% of its revenue in U S dollars significantly reducing FX volatility in that segment.
As for interest we did uptick expense this quarter by $3 million, but this was contained by low debt levels below leverage ratio of two <unk> zero and with roughly 70% of our debt at seven zero percent of our debt being at fixed rates.
More on this in a moment as well.
This all contributed to healthy adjusted EPS of <unk> 65.
Up 12% on an ex <unk> basis.
Operating cash flow for Q3 was terrific at about $120 million for the year to date totaling $336 million, representing an op cash flow conversion of over 115%.
Together with a favorable settlement and asset sale proceeds earlier this year year to date deployable free cash flow totals more than $5 billion, enabling M&A debt reduction and increased buybacks.
And finally, I would like to reemphasize comments, we made last quarter.
With significant new joint venture activity revenues are becoming less indicative of the economic progression of KBR.
From a business portfolio and financial perspective, we are focused on profit growth strong cash flow conversion lowering our cost of capital and achieving strong predictability.
On to segment details on slide 11.
Starting with STS topline growth was an excellent 16% all organic but even better earnings growth of over 60% six zero on heavy mix of license activity across the intellectual property portfolio and growing contributions from equity and earnings.
EBITDA was 20% of revenues.
Well ahead of our target in the mid teens.
As the licensing mix can change quarter to quarter I would reiterate our STS margin target remains mid teens.
With expected annual improvement of 1% to two percentage points per year.
However, and as suggested in our last call the market conditions are robust vis vis our offerings and our IP and we are tracking ahead of our $300 million targeted EBITDA by 2025.
This diversified low risk unique global business is proving out its growth plan is showing resiliency and adaptability excellent profitability and continues to consume no working capital.
There are not many businesses out there that deliver these attributes.
Sure.
Government continues to be steady.
While the appropriations for government spending are strong in all of our markets. We are seeing some outlays drag, particularly in the U S.
Certainly part of this is due to focus on supporting Ukraine.
And we're very proud of our own efforts to assist the U S. European command on this mission under Logcap five.
Margins were good at 10% for the government segment, reflecting upmarket offerings and ongoing strong program performance.
Again foreign exchange did impact reported revenue and profit levels here in this segment, but did not impact margins.
On to slide 12.
As Stuart mentioned earlier strong cash flow is driving capital deployment options and we continue to believe a balanced approach and deployment is most prudent.
We use over $70 million for the acquisition of Lima returned almost $70 million of cash to shareholders via buybacks and dividends and our leverage ratio did not change from last quarter.
While not shown here, we bumped up our interest rate swaps to protect against rising rates are.
Our fixed to float ratio is now circa 70% fixed with much of that achieved through proactive and now quite valuable interest rate swap agreements.
These agreements endure through 2027, and keep our fixed borrowings at a very attractive rate of under 3%.
I think that deserves a real shout out to our treasury team once again.
We increased stock repurchases to $50 million in Q3, and with that our board approved an increase to our buyback authorization to $500 million, representing 7% to 8% of our market cap.
And finally onto guidance slide 13.
We're ahead of pace through Q3 with strong overall business visibility into Q4.
We are narrowing our topline range for.
For revenue to $6 5 billion to $6 7 billion for the year.
We're upping and narrowing our adjusted EPS guidance to $2 60 to $2 65.
And reducing the expected tax rate range by 1% with R&D tax credit is expected in the fourth quarter.
The increase in our EPS guide as a result of strong year to date operational performance.
Plus the expected R&D credits, which together more than offset headwinds from FX and interest.
Lastly, we are increasing and narrowing the adjusted operating cash flow guidance to $375 million to $400 million.
With margins being unchanged.
So thank you I'll turn it back to Stuart for closing remarks.
Thank you Mark and onto our final slide of today's slide 14.
I think we can all see that KBR remains very well positioned opposite of long term thermotics, but really favor our solutions and our technologies.
Our STS business is exciting near medium and long term market tailwind.
It has increasing backlog margin in EBITDA and as a proportion of earnings.
Just over a third of this quarter and overall KBR continues to increase given performance and.
Pace growth.
Our government business is very well positioned in attractive areas of increased focus on funding.
A substantial long term unpredictable backlog and clear differentiation with our international portfolio.
End market momentum in areas of global importance.
The things that matter is reflected in our strong pipeline.
We have and we will continue to demonstrate discipline and balance around capital deployment strategically.
Strategically enhancing our portfolio and also recognizing value in our current trading price.
Our 2025 targets remain intact, regardless of world and market volatility.
Interest rate increases and the FX.
And our strong balance sheet helps as does the multiyear visibility of our backlog a very clear differentiator for KBR.
Our execution has been exemplary and for this I would like to thank our amazing people.
And this combined with our market outlook has allowed us once again to increase our full year guidance.
Thank you and I'll now hand, it back to the operator, who will open the call for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
To withdraw your question. Please press star followed by two.
Preparing to ask your questions. Please ensure you're on mute locally.
Please note we will be taking one question and one follow up from each attendee.
Reminded us thoughtful about one now.
Our first question comes from Ben <unk> of Stifel. Your line is now open. Please proceed.
Good morning.
Hi, Robert.
Congrats on the quarter I guess for my first question your guidance implies earnings decline quarter over quarter in the fourth quarter, Despite Stuart, but I would say.
Through your prepared remarks sounded like pretty solid tailwind at the year end can you guys just walk us through what the.
Why that's the expectation.
I mean, it's I mean.
It's pretty standard if you look back.
I guess, our history I mean the key.
Q4.
It's really seasonality you've got Thanksgiving Christmas.
Factors coming in.
But the main driver there.
There's nothing sinister there is nothing there.
The bottom part of the business as you rightly point out the tailwind is strong, but it's just seasonal.
Okay.
Huge slug of OTW right.
At some level of that of course is not here this year and Thats, a major delta year over year.
All numbers.
Yes, Mark I guess I was talking on the quarter over quarter looking <unk> I didn't know if there was an FX headwind that's assumed in there as some of your hedges roll off or if thats just typical seasonality.
And just seasonality.
The business has outperformed considerably to head off gas quite quite quite reasonably sized FX and interest rate headwinds I think.
I think in our guidance, it's probably $15 million to $20 million for the full year.
So we manage the business performance is nice to overcome all of those headwinds and outperform so it really has been an amazing performance.
Okay that makes sense, thanks, and just as my follow up can you guys provide any update on home safe I know the expectation was for an October decision do you think that timeline is extending or should we hear something in the next few days and then just in the meantime have you started working towards the potential transition. Despite the fact.
That there is still uncertainty there.
Yes, so I mean, we.
There is an expectation as you know the state runs out at the end of October and the expectation is that we'll hear something hopefully this week.
I can't guarantee the court process and the timing of that but thats.
The expectation.
And I think the customer feels the same so we'll see.
Some of these next few days and let me give you a as they get to not quite quickly.
And then in terms of.
Getting ready I think we've said before.
The delay in this in terms of going through the protest period has really allowed us to do.
The backbone development work and setup.
Systems and get the resources in place to Derisk that transition, but there still is a nine month transition period. Once the award. So again we are.
It's not going to be hugely material as we go into next year. It will be obviously some at the end of the nine month period in terms of the moves but the peak is in the summer.
We'll be $100 million I guess I don't normally quantify that just on timing.
But I mean, obviously the ramp up comes in as we go into 'twenty four so.
Very much supports our long term growth aspirations and a terrific win.
Assuming the outcome through positively in the next few days.
Sure.
Stuart just a clarification question on that if we were to find out this week that a favorable decision came in when you think it would be sort of the nine month clock starts at that date.
I think thats right I think there'll be keen just to sit down and kick off.
After a few days after or whatever.
Stopped upon that through.
And then I'll weigh in on this thing.
<unk> been I guess working towards that.
We've made advances in some of the key risk area. So I think like you to understand that.
I think absolutely it should be.
That should be the right timing.
Perfect. Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie. Your line is open. Please proceed.
Hi, good morning, a nice quarter two questions. One just following up on that on the home Safe Award.
And I guess I'd answer your question as Stuart, but more about 2023.
It looks like if we just run rate your second half earnings in 2022.
Our base of earnings for 2023 ish to 60 homes, Dave doesn't kick in until later in the year I guess, we have a positive from plaquemines kicking in more but I'm, just trying to calibrate that with where the street.
I think three or four three or five for next year, if we're missing something there because that seems like a pretty significant ramp and.
And then I guess my second question.
It is on the M&A front I know last quarter, you guys made a comment about being opportunistic.
With potentially larger.
Deal.
Keeping dry powder. So just trying to understand if there was anything done that Brian sort of how the acquisition.
The pipeline is looking.
Thank you.
Okay, well, maybe I'll do the second one in the market.
First one I think I think not much changed from last quarter, Jamie on the M&A front.
The activity is still quite a bit coming into into view if you like.
But I don't think the multiples have come down.
Yes.
Quite quickly.
As expected it does take a bit of time in the capital markets are still not terrific. So I think for us we.
We will run into probably the end of the year.
And the same philosophy as we described last quarter.
I mean, you never know but.
I don't think thoughtful change over the next few months.
But as we come into the year I think the opportunities.
We'll certainly be looking very carefully at them. So.
Yes, so really no change there.
Jamie Mark here.
Well everything on about the same subject to what the court says well hopefully this week.
The clients has been very clear.
That should we prevail and move forward that we will not participate in the busy season of the move in 'twenty three and when you will really start moves towards the end of the year.
So with that.
No that would not be much activity from 2003, so it could be that the street numbers that you referenced are assuming more and so.
We think we should be cautious there because of what the client and the ramp up involved there.
But we'll know more once we get the court decision and what the client after that which can always change but thats.
So all of that warrants that.
Should we prevail, we will we will start to see some activity in Q4 next year, but not sooner.
Okay, and then just a follow up you didn't answer and Plaquemines I know like the margins in STS is starting to improve I don't know how to think about the run rate or how much that helps 2023 or any any commentary on just arguments contribution.
I don't think we're going to talk specifically about one one project and its contribution I think.
The SBS performance outpacing I think you've seen that I think.
Obviously, it's growing sequentially quarter on quarter. The book to Bill would support that continued growth. We've said publicly that we expect it to double EBITDA.
300 by 2025 are way ahead of pace to do that and I will say more on not in terms of guidance when we come out next.
Next year.
In Q4, so I mean, the part were very very upbeat about the positive momentum in that business and the performance that we're seeing and our ability to.
Actually attract great talent into the business with what we're doing.
This whole sort of.
We spent quite a bit tighter I explained the market OLED carbon decarbonization.
<unk> focus on hydrogen in the future and things like that.
And that's a real talent magnet as well so.
All brands, while going into 'twenty three.
Other than that.
Perhaps people have over some of the home safe assumptions I think.
Hi, Mike.
Yeah.
Under Reg and Sps assumptions, I don't know suddenly, but certainly I think.
Pretty strong business performance in that area.
Okay before a best of luck and thank you Allison for your help and welcome Jamie. Thanks, Okay. Thank you.
Thanks Jerry.
Thank you. Our next question comes from Tobey Sommer of true Securities Tobey Youre line is open. Please proceed.
Thank you I was hoping you could speak to the growth outlook for your space portfolio across civil.
The defense and intelligence.
And maybe juxtapose that with the growth outlook for the federal unit as a whole.
Okay. So.
Think the growth outlook.
I guess commercial space Tobey.
For us that's still quite a modest part of our business is not really material. It is growing.
But it's probably not going to move the needle as we move into next year.
I think in <unk>.
Tens of military space, which is.
It's really up going into next year I think there is a lot of excitement about our positioning there and the funding that's flowing into that arena on certainly are.
Our MTBE business is very well positioned.
The advantage of that and certainly we are expecting.
Pretty strong growth double.
Double digit into next year.
What's happening in the civil side, the NASA side, obviously, the budgets are up.
The timing of awards has been slow.
As you are well aware and so I think I think as we can.
And into next year, we'll have some modest growth there probably in the single digits, that's really our expectation but of course that can change on a dime. If you. If some of these awards come through on a timely basis. So I think again.
The indication, but that will be able to give you more color I suspect when we talk about full year 23, when we meet.
The year end earnings.
And the end of Q.
Q1, really February or so next year, so that's kind of where we sit if that makes sense.
It does.
Overall size perspective.
How big is it.
As a percent of either federal or the or the total company.
I mean are.
So that's about $1 billion.
Yes.
And as a sign of some space business unit, we have caused quite a bit of milk things in defense and intelligence. So together.
It's a pretty big chunk of the fluids business.
Our GFS overall and.
And we said on the growth prospects no space in particular.
<unk> and <unk>.
MTGE philosophy pause.
Contribution there is only increasing really exciting.
And.
NASA space of courses that will compare with the other procurements come out, but we've done well with the team more aggressively.
We are confident of those.
If you combine all three areas plus a little bit maybe we do outside the U S is probably one three to $1 5 billion.
Toby.
Thank you.
You've talked about how revenue growth because of the emergence and importance of joint ventures isn't quite as an important metric going forward to measure your success I was wondering if you could.
Share with us any changes in.
Incentive compensation, either that had been made or that you contemplate in order to.
Drive the behaviors of this new kind of business mix.
Yes so.
In terms of our.
Short term incentives, they're all driven by.
Profitability and cash and sustainability.
So they are completely aligned to driving earnings and driving associated cash flow.
That's been the case for some time.
I mean, we said when we redefined KBR.
The focus would be on.
Quality of earnings and delivering cash as a consequence, which is a true measure I think the profitability.
Very focused on not really is just that.
As Mark and that Hasnt changed for several years I think really to comment on performance coming through the EBITDA line, just because of the way you account for joint ventures. It doesn't that doesn't really change the way that we look at winning Waqar compensating our people, we've always gone into bottom line growth.
Thank you very much.
Thank you Toby on next question comes from Steven Fisher of UBS. Steven Your line is open. Please go ahead.
Great. Thanks, good morning.
The 8% organic growth trying to contextualize that so how does that compare to your expectations going into the quarter and what organic growth assumption do you have embedded in your Q4 guidance and I guess the bigger picture here is how relevant is that organic.
Ganic growth concept can be for 2023.
Given what you've just been talking about in terms of the change in equity income and focused on EBITDA as they are going to be an organic EBITDA growth metric.
Be thinking about for next year.
I think we have given.
As part of our long range.
Guide.
<unk>.
Drew.
In the area.
Overall, I think of 6% to 9% little company level.
Yes.
So that when we say obviously, so we've already given guidance that we'll have to look at that obviously in the context of.
The acceleration of Sps.
During an investor day, obviously in the end of Q1.
We will be testing some of these things off to reflect current market conditions and current performance frankly, an and.
But ultimately right now in the numbers.
To 9% CAGR across about EBIT the Ips like.
So again I think over 23, 5% rate tied again so.
So I think everything's in line.
And Thats what have you embedded in Q4 something similar.
Yes, I mean, I think we've said that seasonality Q4 is it comes off a little bit because of what we've discussed earlier in the call.
Okay, and then just more focusing on the government segment.
You talked about some of the outlay dragging in the U S.
The understanding is that.
Maybe overall picked up a little bit.
I'm curious if that's going to.
Start flowing into the government segment at some point do you think about.
2023, how good a sense do you have on weather.
Four of your segments within government should be growing organically.
Next year in order some of the kind of determining factors there.
Yes.
I think I think what we've tried to demonstrate this quarter looking back on our book to Bill in the previous call as Steve is exactly that there is a bit of lumpiness and things like that that's come through.
I think overall, we're very pleased with the quality of the pipeline.
And the expectation that that would start to flow through over the course of the next.
A couple of quarters.
In terms of the outlook across the various segments I think we've.
We're very clear that GSI continues to perform really well has strong backlog terrific terrific margins and it's.
It's going great guns.
No.
Issues, there at all and hopefully people recognize that is a clear.
With KBR contents and the other is I think I've already touched on space.
And I think.
Yes.
Also touched on the guests.
<unk> inside of the space through loyalty space as well.
Growth there I think we're seeing.
Systems engineering business with things like <unk>.
And these recurring.
Quick to procure type contract vehicles that.
That is growing really really strongly in half and we've actually reported that quarter on quarter for many quarters and I think that that momentum continues in those arenas in the fees around defense modernization and some of the digital solutions. We're looking at is absolutely clear and we highlighted again in some of the awards we pegged.
<unk> case this quarter.
So it really brings us to really the readiness and sustainment business and of course.
Our expectation is that the mission and particularly <unk> will be more enduring settling into into next year. That's the visibility we have today.
And obviously with the addition of home and say I think.
That segment changes changes.
Quite considerably so so we're feeling pretty good about each of those segments and the pace of growth.
On readiness and Sustainment will really be driven I think by wholesale.
Obviously, hopefully know more about that later this week and we'll be able to come to market quite soon.
So for me.
Terrific. Thank you Stewart welcome Jamie.
Yes.
Thank you as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad.
Our next question comes from Andy Kaplowitz Citigroup, Andrew Your line is open. Please go ahead.
Hey, good morning, everyone.
Good morning.
So maybe you can give us a little more color into what youre seeing in the U K. Obviously, you obviously increased your exposure there last year phase <unk> Nash this year Veeva, how are those acquisitions doing and do you expect to see any impact from the slowing in UK on your businesses.
So we announced last quarter and good questions.
But really we had added some executive team.
Team by bringing Paul Kahn.
Seasoned.
Executive in that arena.
And we're driving integration, particularly FEMA money into close enough.
That will be a very strong brand for us and the UK is very well recognized and I think the law.
Level of funding that the UK government are committing as are the Australian government.
And to defense is increasing.
Of course, we've got the complexity in the UK Brexit as well.
And obviously, we've got more on our doorstep in Ukraine. So so it's a very.
Interesting time in the UK and.
Got it.
Our revolving door at number 10 Downing Street as well as hopefully that solved at least for the next one.
I think a little bit stability with the political scene I think the commitment around defense is clear.
From the Conservative government and <unk>.
A consequence of those businesses are growing really well.
Our work in defense digital is going exceedingly well, we're doing which is realizing that.
Maybe at the moment.
And we expect that to move into other arms of the military because we're at forefront of the digital transformation.
Programmatic skill set.
And then secondly, I think just the work in government in general is as is flowing into phase of nausea.
I'm very pleased to announce that they are actually growing.
And that type of business I mean, one of the the acid test is just people growth.
People are gross numbers are up significantly so so 11 in double digits. So I think that.
Those businesses are going terrifically well.
I think we.
Very much aligned with our values.
Cultural alignment is really strong.
Really feel that they do things that matter also.
Yes, I think absolutely it can be it can be more freestanding.
Great Great great people.
Thanks for that Stuart and then maybe kind of a similar question around Sps in a sense that obviously slowing global economy, you've had very strong book to Bill There I think you said $1 nine this year.
You do have still some energy exposure I don't know if I'd call legacy anymore, but.
It's a much different business than it used to be could you still see.
Vacations still this is a very positive book to Bill in STS as you go into 'twenty three even at the global economy continues to slow.
Yes, I think so I think I think the.
As I said, we've got this attitude carlin on.
And I can't see that changing in terms of the drivers in those markets I mean energy securities right at the top of the list for obvious reasons.
Some people have been talking about blackouts in certain parts of Europe and things like that.
It's pretty scary stuff in so the diversification of supply is right at the top of the agenda.
And then you've got the whole climate change agenda, and you've got the fact that the segment has been underinvested in for a couple of years. So the supply demand piece, let's say with the reductions coming.
Out of Russia et cetera.
Our obvious and so I think <unk> got and then if you think about the next piece of that is that is that you've got.
I guess oil companies and national oil companies and chemical companies.
<unk> got quite a lot of resource and financial capacity given recent pricing.
And they've got commitments around a hydrogen economy into the future and decarbonizing their the way they produce energy and so you've got all of these factors at play that are hugely aligned with our technology and our high end solutions.
Nickel capability and so I really think it's.
I cannot see that slowing down I think we're very well positioned in <unk> and <unk>.
Certainly a book to Bill would reflect that.
I will say the critical opinions.
Good job, regardless of how people talk about the outlook and I think that is reflected in our performance as reflected in our bookings.
I appreciate it Stewart welcome Jamie.
Thank you Andy our next question comes from Michael Dudas of vertical Research partners. Michael Your line is open. Please go ahead.
Good morning, gentlemen, Jamie awesome.
Michael.
First.
Martha Stewart can you remind us.
Any.
Recompete that are left for this fiscal year and as Youre looking out to 2023.
Not for this year I think.
<unk>.
All behind Us.
And into next year I think.
I think we've got one of our big massive ones I markers, but that will largely be the time that procurement processes on it will be into 'twenty four I think a recompete.
Sure are quite low.
Activity to get out the door in terms of proposals and all of that but the actual risk.
Really falls into the following years.
Really quite a bit of a book to bill.
Ill cover.
23 already in the north.
<unk> continued to grow until we start the year.
The guide in 'twenty, three there's really as well backstopped by our work under contract.
Thank you and following up Mark.
You recall you guys have talked about.
The M&A pipeline.
What's even happening near term and you've done a great job on hedging some of the debt with some pretty attractive reaching <unk> environment. So as we look towards free cash allocation next few quarters.
I know there is it's balanced.
We anticipate continuing to allocate capital to share repurchase.
Yes, Stuart mentioned earlier that we think the price represents a very good value on the buy side right now and we demonstrated that with $50 million of buybacks in the quarter. So that's an uptick.
Historical levels and you saw the increase in the authorization as well.
So our board is very supportive of this as well.
We'll look at our dividend is the only to do at the beginning of the year and we'll talk about that in February but we of course have a strategy to pay an attractive dividend. So we will pay good attention to that is what I would just.
Going back to the last call to say that in light of the interest rate environment and there is more cards to be dealt with there and despite the success we've had in hedging.
Exposure, there, we still all things being equal prefer to be cautious with capital.
At this time.
See that shake out and that would really portend to the M&A area.
We've always been very selective will be very very selective in this market given the valuation comments made earlier as well as the.
Unknown interest rate direction.
Okay that makes sense mark thanks, gentlemen.
Thanks, Mike.
Our next question comes from Sean Eastman of Keybanc capital markets. Sean Your line is open. Please proceed.
Hi team, thanks for taking my questions and Alison definitely deserve a shout out here. Thanks, so much for all the help and time over the past number of years.
I wanted to come back to the.
GFS revenue discussion.
I just wanted to try to flesh out what the big swing factors are around where the revenue run rate goes from here over the next say 12 to 18 months.
It seems to me like perhaps the no.
A piece of the business is one of the bigger swings.
Correct me, if I'm wrong there.
But maybe just update us on what's in the near term pipeline there what we should be tracking.
And.
And just how to think about the swings around the revenue run rate.
The bookings momentum NCS over the next couple of quarters.
Hey, Sean first of all I'd say.
Yes.
NASA flash.
Sid space.
As well the procurements are putting chunky, that's a pretty steady state.
I expect to see modest growth there not.
Not a lot of volatility.
And what we see that and Thats. If you look at the past that's been pretty consistent.
Funding.
NII, which has more IV Ikea vehicles is the beneficiary when there is a lag in outlays when they got money appropriated that you'd need to spend and we're starting to see.
Or green shoots there toward the end of September and October so feeling pretty good about.
Pace of spend in that area, particularly.
These are the things happening in the world military wise and the need for.
Capability and so that team that was able to deliver in those things and systems integration and so forth. So I think that one has opportunity.
In that light readiness and Sustainment.
Always been subject to world conditions.
So earlier, we see pretty pretty stable situation.
<unk> com.
Result of what's happening there.
Great story as GSI, because they have gone through a transition to market their offerings to consulting and advisory.
Thank you <unk>.
Monarch went really well and integrating as a team and thats all it substantially better.
Better margins.
<unk>.
Then.
Task.
Past history as well as <unk>.
GFS profile, so the quality of where we're seeing growth.
Particularly DNI in GSI relative to margins as well.
Very helpful.
Around here and so.
Excited to have the contract position and the momentum and the ability to add people in sports that earlier.
National Fund, which has been a big success in recent months.
Okay. Thanks for that Mark and then and then one of the elements around Sts.
I heard an update on.
This quarter is mirror and I think Dow was out earlier this month accelerating their sustainability goals agreement with.
As part of that.
So just any color on how to think about how that opportunity set filters and to the STS segment over the next couple of years would be great.
Yeah.
Honestly, it's a terrific piece of business.
We announced the <unk>.
Yes Capex deal.
And just recently.
Last week and that's another.
Possibly III cycling in Korea.
The momentum around this is terrific I think.
I have not exercised their option to take equity in <unk>.
<unk>.
So they not only 6% of mirror I think.
Something around that number.
As well as obviously the commitment to offtake. So so I think ultimately it's not just KBR, you've got you've got some pretty serious players pulling a lot of putting pairing.
A lot of calories as we say into into making this a success.
And I mean.
I think it's going to be really really positive to KBR story as we move into next year I think.
If you just think where we are in the cycle.
We are selling licenses today.
The level of uptick in revenue and return to KBR as we go into more engineering, and obviously execution around marginalization and proprietary equipment.
Im actually supporting the ongoing work.
They're probably through Pls the.
The technology related industrial solutions business.
I must say I know that you guys.
Think about it quite strongly.
Given its enduring nature of the contracts.
Hi, Ashwin its own this quarter had a book to bill well in excess of two.
So really really strong we don't normally call that out, but it's being driven part of that business and obviously, it's going great guns as well. So I think mirror is a huge part of us and I think as these.
As these developments mature into execution, you'll certainly see the revenue uptick in return uptick to KBR.
So more to come but very exciting.
Okay. Thanks, Stuart I will turn it over there.
Sure.
Thank you shown on next question comes from Jerry Revich of Goldman Sachs. Jerry Your line is open. Please go ahead.
Yes, hi, good morning, everyone.
Got it okay.
I'm wondering if you're going to expand the discussion on heritage Tech.
As I look at slide seven you folks have had really a number of orders green ammonia.
Carbon capture technology as we look at for the legacy Heritage Tech business. Today can you talk about what proportion of the bookings coming in are for Green technology.
Plastic recycling and each other.
Their areas because it feels like there a disproportionate portion of the bookings.
We've seen over the past year.
Yes, there are certainly more emphasis on the green technology portfolio, that's for sure and I think I think over time.
We talk about <unk>, it's really around hydrogen and I think everyone understands that.
We're also not really talk too much about this but we're actually doing standalone hydrogen developments in the U S. For example.
So certainly the the new <unk>.
Hey, Bill Rhodes developments far more profitable in terms of rates of return for the year. So I suspect more of them to come so I think youre going to see an increasing amount of.
Of sales green from that portfolio as we move forward, Gary, but but ultimately there is still an energy security challenge on.
So there is still investments in what I call more traditional solutions.
Our olefins business is doing very well.
Petrochemical licensing is also doing very well so they will come with the green aspects in terms of.
Decarbonization and efficiency and nor do use et cetera.
If the market holds.
But ultimately we're seeing our portfolio selling very very well rather than just one or two technologies across a range, which I think actually is terrific. Because you can never predict timing of these awards and so.
The more Rins you have in the company.
Probably the more predictable and the growth is and that's what we're seeing so so but I do agree with you I do think that as we progress over time.
Certainly the hydrogen aligned technologies are going to be in the secular economy, allowing technologies are going to be very much.
At the top of the park.
And.
When you look at the bookings that you've had just for heritage Tech.
In the past year.
Just qualitatively it feels like you've been running north of a one five book to Bill.
In that sub segment can you talk about whether we see a big ramp up in.
Project execution and revenue burn over the course of.
<unk> three <unk>.
What's the duration.
<unk>.
On these awards.
I mean, I think as you know that there was in that arena are actually quite fast paced.
And typically everything goes to Hell.
There's a lot rides on Q4, obviously as people try to realign budgets and spend money on things Q4 is usually quite an active period for that part of the business.
But when you look at STS as an overall business rather than just <unk> energy security or whatever it is like.
And so it's an overall offering that delivers.
Huge value to customers across across that value chain and so thats. The way we look at it that so when we talked to the market about it we've talked about the overall growth and margins and the book to bill across the.
That business so.
We are seeing more and more activity in the Green Arena no doubt about it.
We're very well positioned and we we actually realign the whole of our historical business opposite that market.
A couple of years ago, and I think thats paying dividends today.
Sure.
Super and lastly, Stuart on that note in terms of long term targets I think youre at 90% margins for <unk>.
Sustainable Tech segment Youre at 20% this quarter, how sustainable is that 20% near term you called out a number of items I'm wondering if you just just expand.
What's the run rate as we stand today, if you ask about any lumpy items, yes, I think yes.
Yes, so the run rate is above pace. So I think last year I think when you.
Some I think when you take out some of the one offs and things were running.
Lower teams, adding 14% last year, and we said we'd grow that grow the margin, 1% to 2% per annum.
I think.
Upper teens in terms of when you look at blended over over the year. So I think that as Mark said, the 20% that we delivered this quarter is due to healthy licensing mix.
But when you actually proved out across the whole year. We are ahead of pace, but we won't be at 20% and that's for sure I think it will be in.
The Hyatt the upper teens.
That level, but again, that's a hugely positive statement.
Yes.
We've got to put it in context, it's a terrific performance.
About hitting that in the next three or four years when we.
<unk> initiated the targets and we're there now so we may see an acceleration from great mix great markets.
Other projects kicking in as well. So we're ahead of the game as we said all along and Thats why we made the comments on the 300 million EBITDA.
Meaning achievable on a faster pace as well.
Super Thanks.
Thank you Jeremy our next question comes from Gautam Khanna of Cowen Your.
Your line is open. Please go ahead.
This expensive Raytheon for gas and thanks for taking the question.
Could you provide any sort of commentary or quantification around European command sales in 2022, and maybe 2023. Thank you.
Yeah.
I think we are.
Probably around about <unk>.
65 to 75 a quarter.
It was a little bit, but it's pretty constant around.
Yes.
<unk>.
Into next year.
Great. Thank you.
Okay.
Thank you next question comes from Jean Ramirez of da Davidson Gene. Your line's open. Please go ahead.
Hi, This is Jonathan mirrors for Brent Thielman at D. A.
Good morning, John .
Sure.
I wanted to start if you.
Give us some color then.
Wish you anticipate a continued ramp up in activity related to Logcap in Europe in the second half or is that plateauing.
I think we are.
So I guess, we just covered that I think it's I think it's stable at the moment between 65 and 75 million.
I think the.
That's probably the visibility we can give you at this juncture.
As we move into next year.
And some quarters that does uptick depending on I guess mission demands et cetera, but that's probably a good way to think about it and model. It at the moment and hopefully as we get into the end of the year.
We understand what's happening in terms of <unk>.
Some things into next year, we will be able to update that number.
February February earnings.
Thank you and.
Could you provide more color on the government solutions are you able to comment on work under contract for 2023.
Not yet.
I mean, I think we I think we are in.
Unique position that we do have a substantial amount of work under contract.
Not just for 2000.
25, and beyond and we've been very clear about that but assuming that.
We keep our recompete switch or not high high numbers I mean in.
Nominal rate, then we probably got about 60% 70%.
70% of our work under contract today to achieve our overall 25 targets.
And so.
Obviously that goes up the closer we get to 25 as we win new work. So we've not set the guidance for 'twenty three yet so it's difficult to tell you what kind of contract levels, but but we'll be going in with.
Obviously quite a substantial amount of work under contract given what I've just said in terms of the long term.
Our core business, but also the book to Bill in STS really helps as well. So so I think we'll be going in and giving giving guidance in February with a strong underlying will come to contract metric.
But I don't know what the numbers yet.
No problem, okay. Thank you so much.
Thank you.
Thank you at this time, we have no further questions. So I'll hand back over to Stuart Brady for any closing remarks.
Thank you very much Charlie again, thank you very much for taking the time and your interest in KBR.
Questions.
To just reiterate I saw some of the early reports coming out.
Our increase in guidance was it typically only to tax and.
Im not couldn't be further from the truth, we tried to lay out in this call that we've had.
$15 million to $20 million of headwind with FX and interest and we've outpaced.
From an operational performance perspective, too to offset that and more.
So.
In these volatile times I think the resiliency of our businesses. This company insurance and the reflection of the numbers. It is not just a finger in the air.
Delivering it.
I think the markets. We're in a robust I think the performance of our people is exemplary.
And I couldn't be prouder of them.
Absolutely terrific. So thank you again for your time.
We look forward to follow up calls and I'm talking to you all soon thank you.
Ladies and gentlemen, this concludes today's call. Thank you for joining <unk> disconnect your lines.
Okay.