Q4 2022 KBR Inc Earnings Call
Hello, everyone and welcome to the KBR, Inc. Fourth quarter 2022 earnings conference call. It will begin shortly.
To ask a question ready for the Q&A session. Please press star followed by one on your telephone keypad now.
Thank you.
[music].
Yeah.
Hello, everyone and welcome to the KBR, Inc. Fourth quarter 2022 earnings Conference call. My name is Charlie and I will be coordinating the call. Today, you will have the opportunity to ask a question at the end of the presentation if you'd like to register your question. Please press star followed by one on your telephone keypad.
Now I hand over to your host Jamie debates begin Jamie. Please go ahead.
Thank you Charlie good morning, and welcome to Kbr's fourth quarter and fiscal year 2022 earnings call.
Joining me are Stuart <unk>, President and Chief Executive Officer, as well as Mark Sopp, Executive Vice President and Chief Financial Officer.
And Mark will provide highlights from the year 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.
The 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.
Discussion also includes non-GAAP financial measure that the company believes to be useful metric for investors.
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.
Thank you Jamie.
Thank you for taking the time to listen this morning.
On slide four now you've seen this before it's.
Zero.
Today, given its year end I would like to focus on health safety and security which is.
The button on the top right there and really have a look at our performance in 2020, twos, which are going to do it on slide five.
So when it comes to Hs.
We focus a lot on leading indicators things like visible leadership interventions courage to care conversations path planning and things like risk assessments.
This strikes the right behavior in line with our people centric values.
Sorry about that.
We do on the front end is really working is of course what comes through on the backend. So the lagging indicators that remember we believe good safety is good business.
Often there's a direct link between safety performance.
And mission on project delivery performance.
So I am pleased to report that in 'twenty, two we had one off if not the strongest performances in our history with a total recordable incident rate of 079.
91%, 91% of zero harm days across all our projects our sites offices on a global basis and these numbers include contractors and subcontractors under our responsibility so quite a performance.
Both of these logging indicators are industry leading.
A direct result of the amazing performance of our people.
And our partners all over the world.
This takes our laser focus day in day out 24 seven.
I'd publicly I'd like to thank everyone involved the team truly delivers.
We've highlighted some standout projects and programs as well as some of the external awards. We have received during the course of the year from low cat five spot.
Aspire program in the UK to amazing performance in recognition in Saudi Arabia for sustainable technology to what we do for NASA and last but not least the ongoing work in the European Theater.
Cadence, hi, crush changing scope and requirements.
With exemplary safety performance.
There are of course, many many more of these but hopefully this gives you a sense of the global and cross segment nature of the 22 performance.
Now on to slide six.
Now normally earnings we talked about the quarter's results.
In brief we closed the year exceptionally well over performing across all key metrics are really strong finish both operationally and fiscally.
I've thought however, I would concentrate more on the overall health of the business in 2022, and how this positions KBR going into 2023, including confidence and a 25 targets.
So let me start on people.
The people of KBR do things that matter every single day.
I want again to thank them publicly for all that they do.
But we see what we say today would be really hole without recognizing this incredible team.
That said and as everyone is well aware there is a real Warren talent ongoing what's really heightened through 'twenty two.
I think we managed through this pretty well and over the year, we increased our headcount by 8%.
Which I think sets us up nicely going into 2023, especially when you consider that we also drive shareholder value through IP proprietary equipment and catalyst sales.
As a testament to the progress, we're making towards caveat being a talent magnet and in so doing provides unemployed experienced analyzed each and every person the opportunity to bring their whole selves to work.
The feedback from the employees themselves.
82% believe KBR is in fact, a great place to work.
During the year, we advanced our R&D agenda across the board with both gender and ethnicity improvements and we were recognized by Forbes as the worlds top female friendly company.
Over and above we've been externally recognized also as a great place to work in multiple countries across the world.
<unk> is a true reflection of our aligned values globally.
We were also recognized by the Wall Street Journal is a best managed company by Fortune magazine as one of the world's most admired companies.
And as most on a company by institutional investors and we ranked at the top of the class amongst both midcap and overall sector peers.
These accolades to not only improve employee engagement, but also benefit retention and I think our ability to recruit which is the key point here.
Don't get me wrong. This is a journey that never ends for us certainly not perfect.
There is more to do but we are committed to continuous improvement and our people focus.
On ESG zero harm I covered our safety performance earlier, so I won't repeat that but impressively and of course as you would expect 96% believe KBR is a safe place to work.
Now that means that they believe that we care and that we look after our people, which is really really important to me and the team.
Both physically and mentally.
Being a responsible company in an ESG leader for Us table states, but as you can see the unique aspect of KBR as we align our sustainability capability.
Correctly to shareholder value and increasingly so with circa 40% towards zero percent of earnings derived from sustainable activities.
And as you know since 2019, we've been carbon neutral and we're making good progress towards our operational net zero 2030 target.
Now on to business growth growth on the bottom left.
Annual book to Bill across the company. It was one two times on a trailing 12 months basis.
<unk> delivered $8 $2 billion of bookings and options and really allows us to maintain momentum as we head into 'twenty three.
You can see we've got strong backlog coverage.
Importantly, and attractive pipeline that includes $10 billion submitted and awaiting award just to level set that up 10% from last year.
To be clear home safe is not included in bookings nor in backlog or in pipeline given its scale to show an apples to apples comparison to what we've previously reported.
The key takeaway here is that we have over 70%, 78% of our work under contract to deliver on our 'twenty three guidance, so really strong coverage.
Onto financials, obviously, mark will cover these in detail.
The year quarter after quarter, we proved resilient. We grew we grew revenue in line with our targets.
Margins were strong operational performance and a strong Sts market.
EBITDA dollars ex OE W was up 18%.
An amazing earnings performance cash performance was absolutely terrific.
Shortly there weren't no surprises and we beat and raised guidance twice during 2022.
KBR is a business with predictable growth attributes technical.
Differentiation expanding margins minimal concentration risk, a real differentiator and strategically positioned in well funded markets.
We promised a balanced capital deployment strategy and I believe we delivered on this by maintaining responsible leverage during periods of volatility in 'twenty, two while returning close to $270 million to.
To shareholders now we have plans to up this in 2023 and beyond that Mark will cover later.
Strong operational performance in fiscal management allowed us to meet and more than overcome interest rate and FX headwinds through the year.
Without which our IBD would have been circa $15 million higher so again, a terrific performance by our people and our operations.
Now onto slide seven.
As we head into 2023 I wanted to spend a few moments expanding on our sustainable technology business.
As you'll see in a few seconds STS has grown above expectations.
Especially in <unk>.
As we talked about previously.
And this is expected to continue into 'twenty three and beyond.
Worth, noting STS now represents almost 30% three zero percent of Kbr's group adjusted EBITDA today.
At the top level, we sell and deploy IP.
Unsustainable services to growing markets across energy transition energy security climate change and smart affordable solutions.
The attractiveness of these markets and acceleration of our performance towards our long term.
<unk> is worth exploring a bit further.
So by the numbers, we will meet our 2025 STS target.
23.
The bucket of Investor day in 2021, we said, we double our EBITDA by 2025 heading circa $300 million.
So we're well ahead of pace.
So what's driving this.
Demand for IP has increased not just for hydrogen and pneumonia, but for plastics recycling for olefins due to clients wanted to diversify and optimize the product streams green refining solutions lithium extraction for EV batteries et cetera.
The solutions desired are moving from traditional gray to blue and ultimately to <unk>.
Our pipeline is very strong across a wide portfolio of technologies.
The ammonia to hydrogen is super exciting, but I want to reiterate this acceleration is multi faceted.
Now on ammonia and hydrogen itself the uptick in our pipeline for Blue ammonia, So think traditional gray with renewable energy and carbon sequestration in combination for example.
<unk>.
Significantly.
And I recently visited Japan.
And their commitment to co firing ammonia in their coal fired power stations is clear, which will drive significant immediate medium term demand.
Ammonia cracking so converting ammonia back into hydrogen is also an exciting opportunity and it is a right, but it will again further drive medium term ammonia demand.
So really excited.
Also this year.
<unk>.
The middle East and publicly announced capital spending.
Lending programs through to 2030 is enormous while in the trillions.
And without fail the various countries are committed to doing this with a green and decarbonization somatic and all of that we do so.
So think world scale blue ammonia gas to power to stop the budding of crude crude to chemicals to ink to increase product optimization renewable power significant due to sequestration and not to mention things like sustainable cities et cetera.
As you are aware we.
We've had a really strong presence in the middle east for decades.
We're seen as a key partner there as a reference point our revenue from STS alone in the Middle East grew 26%.
In 2022.
Now you've seen this blue chip clients have recently announced significant returns.
Across the globe, which of course facilitates increased spending for the improvement in decarbonization of existing assets.
We look to shore up energy supply and the security plus of course their plans associated with their ESG story.
Energy transition hydrogen et cetera.
The demand for a sustainable services has increased as a consequence in the level of synergy between our sustainable IP offering on a sustainable services as significant as we've shown here by the intersecting circles.
A good example of this would be mirror.
Plastics recycling technology, but we obviously sell the hydro PRT IP, but in addition, we assist across the delivery spectrum for module realization balance of plant engineering program and control management commissioning support et cetera.
Our view is that in the medium term the size of these two will continue to be very similar so I think a 50 50 split and of course be increasingly symbiotic.
So on to slide eight.
You can see how this business has really taken off since we restructured and loss and launched sustainable technology solutions.
The outperformed in 2021.
And again in 2022 and as I said earlier, we will meet our 2025 target in 2023, two years ahead of pace with ongoing growth and earnings momentum.
2025 and beyond.
Now clearly we're feeling really good about that 23 number but of course this allows us to firm up even more behind 2025 adjusted EPS target.
As I said earlier STS was close to 30% of Kbr's earnings in 'twenty two.
This will be closer to 30, 66% in 2023.
We've always said our focus was on quality of earnings and this is a great example.
Now before we turn to the next slide I just wanted to talk about government solutions for a few sacks.
There has been little change in the market. So no real update here and hence the slide but it's important I think to reiterate the following a more particular to KBR.
Our international business.
Particularly across the consulting and advisory area in the UK and industry.
It is looking at double digit growth as we go forward.
<unk> International is now set at 20% of <unk> earnings as we move into Q3.
The op tempo in Europe for our <unk> business has not slowed in the slightest.
This is set to continue again as we move into 'twenty three.
Also in the U S long term <unk> budget smelting unacceptable to KBR up double digits, so a key market.
Within this space force are growing faster, which is being reflected in our ongoing growth.
Also this has a direct impact to the broader defense and Intel segment, which grew nicely in 'twenty two and is expected to do so again in 'twenty three and beyond.
National Security, but I'm sure we will see.
Foreign objects being shutdown above the U S and Canada.
As ever more ever more critical and of course in focus.
The wholesale transition is going very well with strong alignment with our customer and.
And ramp up as you are aware is expected through 2024 and 2025.
Civil Space Awards will catch up we believe in 2023, new contracts like the space a cone contract and program will continue to gather momentum as we move forward. So in short <unk> is on pace underlying with our 2025 targets.
We have multiple pathways for growth across the <unk> landscape.
Internationally.
And of course, the increased corporation via our office between the U S. The UK and Australia will also gather momentum through 2023, as we look to security in the Pacific.
So, let's turn to slide nine.
Today, we've given you more detail on sustainable technology.
And we are excited we are well ahead of pace.
We've also highlighted multiple routes to success across our <unk> portfolio and combined with Sds you can really see the resilience, but also the excitement we feel for <unk> future.
We outperformed 2022 to overcome and actually a bit more the headwinds of inflation increased interest expense on FX.
Sales to continue to do so so no excuses.
I'm just delighted to reaffirm our adjusted EPS 2025 target of $4 75.
We are ever more confident of achieving this target.
I'm sure there'll be some moving parts with EBITDA Directionally up which of course is terrific as you've seen with Sts's performance, but things like interest expense et cetera are also offsetting what you would expect.
Now previously we gave you the walk under contract to achieve our 2025 target and using the same basis of calculation. This now sits at over 17%, 17%. So hindsight of increasing confidence also.
Our cash performance continues to be really strong so absolutely no change there we deployed more to shareholders in 2022 that ever before.
We will cover in more detail our plans to do more.
Now speaking of Mark now it would be an ideal time to handover.
Mark will run you through the year and a bit more detail you'll cover of course capital deployment and conclude with our 2000 feet Guide Mark.
Awesome. Thank you Stuart I'll pick it up on slide 11, and I'll say it sure is a pleasure to report another year of healthy balanced financial performance and progress toward achieving our long term targets that Stuart just covered.
Revenues for 2022 were in line with expectations coming in at $6 6 billion.
And as you can see up 9% over last year on an ex <unk> basis.
Six of this 9% was organic growth.
As a reminder, <unk> operation Allies welcome was the large episodic humanitarian support effort that generated about $1 6 billion in revenue in 2021 with a few hundred million spilling into early 'twenty two.
All business units within government solutions and sustainable Tech Sps.
Contributed to growth this year.
Sure, it's nice to see STS turned the corner on producing topline growth as legacy where continues to trickle off ambien.
And being replaced by much more profitable and sustainable endeavors.
Just like our plan all along.
Profits were the bigger story.
And we've been emphasizing this with investors for some time.
Our strategy has been to focus on upmarket offerings in the government.
And high margin IP and integrated solutions and sustainable Tech.
This shift underpins the profit margin improvement plan, we have been body in our long term targets.
Our results for 'twenty to show, we are off to an excellent start indeed.
Adjusted EBITDA margins grew to 10%.
With improvement coming from both Gov and sustainable Tech.
Together adjusted EBITDA margins grew 166 basis points.
And consequently, adjusted EBITDA dollars grew 7% in total despite equally W headwind.
And as Stuart said.
18% adjusted EBITDA dollar growth excluding <unk> W.
Terrific.
Adjusted EPS finished the year at $2 71.
Above our guide.
Finishing above reflects continued excellent project performance by both segments.
Bigger RMB credit and unexpected.
And FX gains from hedging activities below the line, which actually offset some losses above the line.
An important takeaway for the year is resiliency and agility.
At the start of the year, the Russia, Ukraine conflict required a re pivot on in flight projects and our STS business.
They did so they actually delivered a spectacular year.
We then faced higher interest rates and unfavorable FX developments.
These latter two causes Stewart said about $15 million of pretax headwind, which was overcome by operations across KBR.
This points to strong end markets.
Demand for our offerings.
The KBR, we deliver culture.
And global reach which improves our operational flexibility.
Profits for the year translated to cash in a direct way.
Adjusted Op cash flow of 424 million reflected a conversion ratio to adjusted net income of 110% and.
And 92% on a free cash flow basis.
We did have about $25 million of accelerated collections right at year end.
We also had higher than normal capex in 2022 at a little over 1% of revenues or about $70 million and.
And we actually expect that similar level to reoccur in 2023.
These are primarily revenue generating asset purchases associated with two government contracts.
We do expect normal capex returning in 2024 much slower.
Now I'll move onto the segment details on slide 12.
Starting with sustainable track, what a terrific year.
Again, we encourage focus on profit production given the distortion you get from legacy project work off and our participation in unconsolidated joint ventures were just profit is recognized.
However, as expected Sps produced organic revenue growth of about 5% for the year.
Which importantly accelerated to 17% in Q4.
Together with strong bookings all year during 2022 momentum is strong going into 2023 and the accelerated performance toward covered earlier.
Ses EBITDA grew to 224 million with margins at 18%.
You see the driving factors here.
While there are some mix factors, which can cause some volatility quarter to quarter. We believe annual margins will grow with scale as gross profits overlay lean G&A structure.
As Stuart highlighted STS is ahead of its long term targets.
We believe this one given the combination of market conditions, and our offerings, which are in high demand as the world progresses on de carbonization goals.
And government adjusting early W revenues grew 10% in total.
7% of which was organic.
Growth was distributed with the biggest drivers being our work in the European Command.
International and space.
EBITDA margins were terrific at about 10, 4%, reflecting really strong project performance High award fees scores higher consulting mix and an asset sale.
Offset by the FX devaluation that I mentioned a moment ago.
Now I'll move on to our capital position and deployment matters on slide 13.
So at a high level, we continue to build a stronger balance sheet and liquidity position over this past year I'm really pleased to see that.
Business resilience progressive growth in EBITDA and record level operating and free cash flows drove overall leverage down by almost a half a turn to two dot one times EBITDA over the course of the year.
And despite deleveraging, we continue to make modest but highly strategic investments and acquisitions.
We increased our buyback authorization and we bumped up actual buybacks.
Two over $200 million in 2022.
This plan was deliberate.
We wanted to capitalize on our strong performance to build financial capacity.
<unk> ourselves for prudent deployment to deliver our long term targets and.
And manage our capital structure prudently amidst changing credit market conditions.
Within those goals, we have been positioning to pursue several different paths to navigate through the maturity of our $350 million convertible notes.
Security, which.
Occurs and matures in November later this year in November 2023.
Fortunately, our improved capital position and business resiliency gives us options on how to resolve this maturity while protecting.
Holder value.
As KAR stock price has gone up about two five times since the issuance of the notes in 2018.
The convertible premium as well in the money and above the 100% premium protection achieved with the call option we purchased.
At issuance.
At <unk>, our stock price of $50 incremental value, we owe the holders of the securities above the $350 million notional amount is about $145 million.
So to take it out it's about $500 million all in.
And all of this is payable in either cash or shares at our election.
We do have sufficient capital to resolve the maturity and the convertible premium in cash.
And Thats were going in plan cash.
We expect to use a combination of cash on hand cash flow generated during 2023 committed capital lines.
So our committed capital under our lines of credit.
And that today stands at about $700 million.
And sky and stock buybacks to manage settling the convertible notes and avoiding shareholder dilution at the same time.
Our goal is to have no dilution from now through the end of this year, while resolving while we're solving the convertible.
We will also be opportunistic as well should favorable conditions present themselves.
For example, if long term debt capital can be raised at attractive rates.
We may refinance some or all of the convert.
However, we have no intention of using another convertible instrument to refinance the existing notes or for any other reason.
While extinguishing the convertible is our short term deployment priority our long term strategy remains the same.
Our deployable cash target of $3 5 billion through 2025 is unchanged.
And we expect to continue deploying cash in a balanced fashion and at levels consistent with achieving our long term targets.
At this earlier on.
We will continue to pursue strategic M&A opportunities.
However, we expect the proportion of buybacks to increase given the scale and diversification, we have built with previous M&A and.
And considering the attractive set of organic growth opportunities, we see in our addressable markets and in our new business pipeline.
We also remain committed to paying an attractive dividend.
Which has been in our stated deployment strategy 2019.
And with that I'll move to the next slide slide 14.
We're really pleased to announce another increase to our regular dividend to <unk>.
13, and one half cents per quarter or <unk> 54 on an annualized basis.
This is an increase of 12, 5% and marks the fourth consecutive year of dividend increases to our regular dividend.
These increases have averaged 14% over the same period.
Reflecting kbr's consistent level of growth.
Profitability and strong quality of earnings with high and steady conversion of net income to cash flow.
And while not shown here the increased level of <unk> 54 per year represents a dividend payout ratio of roughly 20% as measured against 2023 expected net income and free cash flow.
Now, let me cover slide 15, and our forward guidance.
We are initiating 'twenty three guidance with six 9% to $7 1 billion in revenues.
Representing growth.
Over 22 by 7% at the midpoint.
EBITDA is guided at 715 to 745 million approximately 10% growth.
And adjusted EPS in the $2 76 to $2 96 range.
To be conservative we've assumed no move activity for home safe and our 2023 guide.
Also for EPS. Our guide does assume we will literally any significant dilution from retiring the convertible notes consistent with the goal and the capabilities that we have an earlier stated.
Tax rates are expected to be consistent with recent history at 24% to 25%.
And cash flow is expected to remain strong and commensurate with earnings at 425 million to $460 million.
So that completes my wrap up with a truly successful year for KBR in 2022.
And also a really healthy outlook.
Quite excited to undertake for 'twenty three.
With that I'll turn it back to Stuart.
Yes, Mark great job, let's move to slide 16, and final slide of today, just it's been a bit of a loan presentation lots to take in so just to give you some key takeaways from today firstly.
Our commitment to make KBR and absolute great place to work for all is unwavering and we made good progress advancing our people agenda in 2022, and we will continue to work that.
We delivered in the year doing what we said we would do on frankly outperformed.
Sustainable technology earnings growth and cash management being absolute standouts.
We presented multiple strategic pathways to achieving our growth targets.
As we head into 2023 with circa 70% seven zero percent work under contract.
And 'twenty, two we returned more capital to shareholders than ever on our smart presented that is set to increase in 2003 on through 2025.
Which gives us increasing confidence in delivering our 2025 adjusted EPS target of $4 75.
Now I'll hand over the call back to Charlie who will open it up for questions. Thank you.
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Our first question comes from Steven Fisher of UBS. Steven Your line is open. Please go ahead.
Thanks, Good morning.
So just one question on your 2025 target.
Mark given that.
It assumes roughly a turn higher leverage than you are at now how committed are you to.
Putting that turn on.
Or are you considering sort of an acceptable outcome.
Our lower EPS goal, if you don't find deals that meet your criteria I know you have a good awareness of discipline on M&A.
<unk> or Mark you May have said that we will see an increased proportion of buyback. So how are you thinking about that turn of leverage in there.
While we are confident that our scale and our diversification and multiple paths to get there as Stuart said, we can lever up.
In this type of environment, obviously will be cautious of environments get extreme but we the outlook looks reasonably.
Within our control and the credit markets to lever up responsibly at that level and to deploy more capital going forward.
Stuart clearly suggested so we're very confident in our ability to perform in the organic business.
We expect to continue to do some tuck in M&A, where we find really attractive opportunities.
And as we singled quite clearly we're very comfortable with our outlook to the extent that buybacks are increasingly more attractive for us and we're comfortable levering up and doing so at that level, we think thats, a very responsible level III zero given the scale, we have and the.
The diversification.
Vacation and multiple pathways to deliver so the answer short answer yes, Steve to do at that level.
Okay, Great and then I know you said that the organic growth was in line with your targets can you just give us what that organic growth was and how you see that developing over the course of 2023 and if theres any color on how that varies within the for government solutions.
Segments that would be great.
Yes, when you look at the GFS business were right in line with the targets that we've set for some time, we are 5% to 8% we're right there.
And we're comfortable that we have multiple pathways to get there we cite.
Stuart mentioned <unk> as a great growth military space and space superiority is doing well for US International piece continues to do incredibly well.
So that's our target for GFS and.
Separate from that the STS as much higher as you would expect.
That embodies the work under contract position, we have coming into 'twenty three.
Okay. Thank you.
Thank you as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad.
Please also stick to one question and one follow up so we can get around to everybody in the queue.
Our next question comes from Gautam Khanna of Cowen. Your line is open. Please go ahead.
Yeah, Hey, Thank you guys good morning.
Don't think of them.
Yeah.
So question just on the pump.
Assumptions on home safety you mentioned, there's no movie that's anticipated.
In 2023 could you just talk about what you are actually anticipating to recognize in terms of.
Revenue and any associated EBITDA contribution this year and how that plays out 24 months you get to full run rate.
Yes, yes revised.
Yes, I mean, we decided to take a very conservative view and now 23 guide Mark explained that we're going through this transition period that we will do with it.
It runs for most of this year.
It is expected to start in the fall.
But we decided just to be very conservative and not include any moves so any moves will be upside from our position today.
On the ramp up going into 'twenty four 'twenty five as as we expressed earlier we.
We think about that cadence moving up so half a billion every six months as we move through and tissue cadence and 25% so thats kind of why.
Our thinking is at the moment, that's the basis of how we structured our targets.
These things I think the way we've done it again is conservative but.
But as we get closer to the end of the year as we sort of get.
I guess further embedded I think that we will be able to give you more clarity, but until then that's the as the assumptions are embedded.
And it's better that we are conservative and surprise to the upside than the other way around.
Yeah.
Thank you.
Thank you. Our next question comes from but <unk> of Stifel. Your line is open. Please go ahead.
Hey, good morning, Thanks for the question.
Hey, Bob.
Mark maybe just a follow up to some of your comments on earlier question. If you look at government solutions organic topline growth to sort of bounce around obviously a variety of items in there do.
Do you still see the 5% to 8% organic growth CAGR is reasonable when we strip out items like home safe and if we look across the segments. It sounds like from your commentary that Eni and art at or ahead of that range, maybe international and science and space are behind but is there a path to those latter two catching up in 'twenty three or is that.
More of a 2024 square feet.
Our business units.
Continue to impress us.
Each year one.
Ends up on the top of the list and so forth. So they do rotate a bit in terms of their contribution.
22 International and space and science were really strong, but we really finished the year with a really good pace in DNI.
That was absent of some pass through of that close to the.
Right. So we feel great about our.
Our positioning on our contract vehicles in DNI and the.
The increased focus of that type of threat that we serve and the and the DNI markets. So.
We believe that will be a reliable driver of growth in both 'twenty three 'twenty four and beyond.
Yeah.
Scientists space those are clumpy procurements as we've mentioned so we do have some on contract growth.
But we are dependent on the big the big things coming to market and those are a little harder to predict so that one.
Steady Eddie for sure great performance, and choppy or growth and so it's hard to say how much happens in 'twenty three 'twenty four 'twenty five, but the overall addressable market and our positioning there couldnt be better.
So I think that were.
As others have said and experience the procurement decisions coming out of the government. We're not very strong during calendar 'twenty two across the board our book to Bill reflects that.
But we got great work under coverage and we expect to reduce the growth that we talked about.
Toward the low end of our of our range on the long term targets for 'twenty three given that condition.
But the atmosphere and spending in this area and our positioning really wait for the long term and Thats why were so comfortable with the long term targets.
Okay. That's super helpful. And then maybe I'm sorry go ahead Sir.
No go ahead I'm, just asking is that.
That was helpful.
Oh, yes that was great Mark Thank you.
I was just going to say, maybe switching to the Fps side and as Stuart mentioned in her prepared remarks that Sds is essentially two years ahead of schedule, so that $300 million EBITDA target.
What's your visibility like maybe both on the near and medium term I guess, we think about 'twenty three 'twenty four 'twenty five.
The conviction that that continues to grow beyond 'twenty three driven by the fact that you have line of sight to that growth in your pipeline or is it just in general what youre seeing in terms of demand for ammonia LNG recycling projects sort of across the gamut.
No I mean, my excitement actually.
Both the market drivers, but also the fact that our pipeline is super strong.
We're entering 2003 with Cui.
Right.
High levels of work under contract.
No.
Sure.
In Ohio than then.
Probably some previous shoes.
I think as Mark said scale will drive margin increase.
We still got a bit of work off of legacy EPC projects that again.
These reimbursable long term ones that are coming to an end this year, but we've got a bit of carryover that will again help drive margins up over time as more costs. So I.
I think our visibility is very strong into into 'twenty four 'twenty five.
We are super excited about the growth dynamics not just in what we do in volume, but the margin return associated with that volume and the quality of the hunting business is terrific.
And everyone forgets actually runs on negative working capital. So the really the cash characteristics of STS is absolutely terrific.
And remember we've got.
Customers today.
Cash rich.
And we've got energy security challenges.
Got decarbonization semiotics, and we've got obviously energy transition and hydrogen opportunity. So.
I often talk about this being a perfect storm and I think it truly is on its and its happening.
And on a global basis, and I'm Super excited about where STS is growing and I think we've proven our thesis that was it was right to move away from from Commoditized construction is right to get out of EPC lump sum. It was it was right to ask should we positioned the business to high value differentiated capabilities and I think it's.
Prove that thesis is proving out well.
Yeah.
Great. Thanks, so much Stuart and Mark.
Thank you Bert.
Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Jerry Your line is open. Please proceed.
Hi, This is Adam <unk> on for Jerry today, Thanks for taking my question.
Was wondering if you can update us on that prospect delays in sustainable technologies.
Particularly I'm interested in hearing more about the mix.
And how big these projects are in the pipeline.
It's a.
It's a mixed bag really there.
The prospect pipeline as I've said previously is super exciting and very attractive and it's multi faceted from from from.
Small medium and large.
As you would expect across the globe.
<unk> of our portfolio I mean in the IP World and what we do in sort of technology led industrial services and solutions.
The scale of those is probably less.
But the cadence is higher.
The visibility into the future is very strong there, but as you know the contract values are probably smaller smaller and sustainable services. We tried to show that it's a 50 50 balance between IP and sustainable services as we are today and moving forward and the scale of some of those.
Quite significant up into the $500 million plus to close to $1 billion type work over multiple years.
But I think the key takeaway here is it's all services.
There is no there is no construction risk.
Involved in any of this.
We stuck to our risk profile in our business our business model.
And I think the results are proving not so so we've got a got stronger visibility into the future because of some of these larger contracts but.
But it is made up of course of high cadence smaller contracts as well.
That's been our past.
Experienced in.
We've seen we've seen that performed admirably over the last well.
Our decade CAGR in the double digits, so I'm feeling pretty good about that whole mix.
Okay helpful. And then shifting gears, how should we think about total company EBITDA margin cadence through the year based on project timing.
Yes.
Yeah.
When logic would dictate it should be rising.
Yes.
We've made commitments.
<unk> said theres, some mix and some of the portfolio like technology that overtime and quarter to quarter. I think you should look at the overall use guide.
Very clear, where our EBITDA is in.
Up double digits, 10% from this year, so real earnings growth above our revenue growth.
So I think that that's impressive.
And then over time, you can see what we're going into 'twenty five targets as well. So I think all up its moving up over time because of scale and mix.
We're feeling pretty confident about that under 25 targets in general.
And I'll just use the opportunity on that question.
Because of the progressive growth of STS and its economy of scale dynamic the profit mix for 'twenty. Three is about 45 55 split first half second half.
So that's a little bit more back end weighted than we've seen in the past, but it is because of the growth trajectory of STS and the margins that come with that.
<unk> cost of these.
Projects that we've kind of Congress for the low margin once you get rid of that in the first half.
Great. Thanks, so much.
Thank you.
Thank you as a reminder, if you wish to submit a question. Please press star followed by one telephone keypad now.
Our next question comes from Mariana Perez Mora with Bank of America Marianna. Your line is open. Please go ahead.
Thank you good morning, everyone.
Good morning, good morning.
My question is going to be related to carbon solutions.
You mentioned that.
Do we need like several paths do you have to cross their international no call.
The geopolitical environment with parks increased spending, especially on defense.
Could you please give us some.
Some color on how you're thinking about the political risk of both a year long continuing resolution next year and as Tony.
Contracting environment <unk>.
Environment being affected by this political uncertainty how are you thinking about that.
Yes, I am.
Sure. That's a question that everyone in the government space it would be not at the moment.
There's a couple of differentiations that KBR brings to the table, obviously STS is outside the all the work we do in <unk>.
Government services international was outside that.
STS is 36% and 23 in GSI over 'twenty, you can understand that that over half of our business is not.
Anywhere close to that issue.
The other thing I'd say is that and this is mostly out of the of the U S.
Multiple long term contracts that are critical.
They continue and we've seen this in previous Crs that they continue to be funded.
You can't stop operating international space station and things like that for example.
And we're very at the tip of the spear operationally positioned as we've talked about in the.
Before so.
We are keeping an eye on that history has shown that it didn't really impact the cadence of our performance. So much it was more of a catch up in cash.
And what we should be managed as we went into the following year. So so it is on our watch list. We don't think its going to impact our 'twenty three targets at all.
And certainly we don't think it's going to impact our 'twenty five target. So so I think we're very well positioned.
I'm not belittling the challenge of toll there will be probably some slowdown.
But as long as this money on contracts and those will continue and if the critical and I'll just say to continue regardless. So so I think we're well placed and of course, we've got our differentiation with GSI and with STS that.
Other than our peer.
Peer group I don't think there's really.
Others in our peer group.
Chip.
Define juno.
Mark anything more to add to that.
Okay.
Thank you and then you have how does 70% that you have.
Under contract today Okay.
'twenty three guidance compares to <unk> and do you have any large re competes coming up this year, how does the timing of that 30% that is remaining.
Mining.
The work under contract coming into 'twenty, three is almost identical to 'twenty two.
On a consolidated basis, so that's terrific and we did well in 'twenty two as you have seen.
And relative to Recompete, we've got one pretty significant one and NASA.
That.
Is underway.
And the rest is very small relative to recompete risk in 'twenty, three and it's actually not that big in 2000 and for either so we've got plenty of time to work on new bids during that low recompete cycle, which we will do.
Alright, thank you.
Our next question comes from Andy Kaplowitz Citigroup, Andrew Your line is open. Please go ahead.
Good morning, everyone.
On R&D.
Stuart obviously very strong growth at STS and you talked about ammonia and plastics for instance is helping you drive your growth that's allowing you to hit your target two years early but are you at all worried about potential cyclicality in the business and how big an impact as the IRA having on the businesses at this point or is it really not started yet in terms of that impact.
Yes.
I think that the market that we have.
<unk> talked about and obviously, we are excited about the growth and the growth prospects going forward I do not believe the cyclical.
I think that we were seeing a long term I mean this is a sector that has probably been under invested in during COVID-19, probably previously interest was a bit of catch up to do I think the.
The whole issue of energy securities at the top table for most countries today.
Say that will take a lot of investment in sorting out overtime. So that's not that's not cyclical we don't believe and I'll just say this the market around decarbonization.
Climate change is not going away.
Rightfully. So so we don't see that cyclical in any way, we actually see that.
But what we can see ahead of us being absolutely non cyclical and a growing part of our.
Our story, so very excited about that.
So no real concern there at all in terms of the <unk>.
I think what we're seeing from our perspective is is that our.
Customers.
Projects in hydrogen and we've announced some of them recently looking at multiple projects then rates have returned to voluntarily gone up because of the Brexit, they're getting in the incentives and so I think for US we will see upside.
Again, not a flash in the pan for KBR, but over time as these projects come to realization. So I think it's a very strong tailwind for us in the U S. I think we will see greater investment in the U S by our customer base as a consequence.
And again I think that really sure.
And again in support what we're doing towards a 475 target. So I think it's all positive on the uncertainty and to be clear on this we do not believe this is cyclical we believe this is.
Secondly, what we can see into the future.
Our continued growth opportunity for KBR.
That's great to hear Stuart So obviously very positive on STS at the $300 million of EBITDA that you can do in 'twenty three but when you look at your overall guide for 'twenty, three and you sort of back into Ges very little EBITDA growth I think for 'twenty. Three is there any sort of mix headwind on GFS margin in 'twenty three.
You're just being conservative given the noise in D C or any any thoughts on that.
Hey, Andy Mark here.
In light of.
Misheard Steve's question earlier the growth in GFS is a little light in 'twenty three because of the <unk> headwind we had in.
In the first part of 'twenty, two that I referenced in my remarks.
Longer term, we're quite confident in the five to eight organic but it's lower than that in 'twenty. Three for that reason margins are steady Eddy in government. So we were 10%.
Or more and Thats been the case for some time and we don't see any major reason to change that looking forward.
Yes, and I think as well.
As Mark said.
The guide if you would.
Take out OE EW and shows growth in government.
10% I mean, it's pretty healthy organic growth.
And so.
So we're feeling pretty good about our long term targets I think we're well on pace and as Mark said, we see no degradation in margins and in fact.
The markets.
The U S. We're seeing double digit growth there.
The margins as you're well aware.
Higher there so.
That should help us over the over the course.
Helpful guys.
Yes.
Thank you Eddie.
Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie. Your line is open. Please proceed.
Charles This is significant telco on for Jamie Thanks for taking my question.
Okay.
I wanted to ask how much of the EBITDA improvement this quarter was tied to the Plaquemines LNG contract and.
And then what is implied for the random quad demands in 2023 died and when.
All right great. Thank you.
Yes, I mean, obviously, there is a contribution coming through above and below in through equity and earnings through to.
What we do on consolidated unconsolidated joint ventures.
We've got a very conservative steady cadence around how we how we would actually realize.
<unk> from these long term projects we take.
Quite a sensible view across this but we don't give.
Details on individual projects per se. So so I think.
The.
At the end of the day, the overall performance of STS.
It's incredibly strong.
Across the portfolio, including what we're doing and not patient and LNG and I don't think you should in any way to get to get to I think that is actually driving earnings as the overall performance thats driving on it.
I want to make that clear.
Okay. Thank you.
Thank you. Our next question comes from Michael Dudas of Research Michael Your line is open. Please go ahead.
Good morning, gentlemen, Jamie.
Mornings to do that.
Hey, good morning, well thank you.
Stuart maybe you could.
Share your thoughts on.
How the integrations going with the recent U K acquisitions.
Enter that market looks maybe that in Australia, which is again, it's been a very good market for you.
And maybe you also have a follow up on your comments about the middle East and the growth there.
Sustainable and.
Is some of those larger service projects after the IP Awards.
Could that be is that an area, where you could we could see some of those in the next couple of years.
Yes.
So initially the integration in the U K.
Right.
As you know we.
We acquired Frazer Nash.
Recently, but <unk>.
Dreamer after that Akshay.
And harmonic accompany before all of the advisory digital high end consulting engineering type space.
I'll speak the same language. They are all lined up behind the <unk> brand, which is very well known and strong in the U K for those high in San Francisco.
And then on <unk> I think the integration is going as well as we could have hoped for interest.
Everyone's upbeat everyone's together move them and move them into two offices that are.
They're very smart.
That in mind I can tell you.
And.
And so I think the employee experiences terrific I think.
Sure.
They are flourishing and of course being part of a winning team as part of works best experience and I think that.
They've won more work to date on November one and their backlog is stronger today than it's ever been so so.
You can see the future and so there's obviously its stability and growth in front of them. So that the people themselves are excited so I can't say any more.
To be more positive I think.
Performing terrifically well.
In terms of the middle East.
The numbers are in the trillions and they go out to 2030 so.
A cyclical event they are looking at.
Their vision through this decade.
And it's quite consistent across the region.
They are driving.
To be the most the best the most.
I guess.
Sustainable being responsible to climate change and.
You can see that in things like the sustainable cities and things not to mention what they are doing in the energy sector. So so for us I think.
We are seeing multi.
Multi year activity, there I think you're quite right when we sell the IP the opportunity to come and then do the sustainable services, our roundup for multiple use particularly in the maintenance side and things like that is absolutely clear and we do a lot of that in the middle East.
So very excited about the growth in spend in our role and.
As I said in my opening remarks that we are very much seen as a partner there and we've been there a long time.
Our <unk> nation in Saudi is at 50%. So we very much seem there was up for more of.
Employing saudis and educating.
For us of being committed to the country and for the long term.
I did Miss I am talking about Australia, I think Australia continues to grow extremely well the backlog is strong.
If government there obviously that you've got there their defense review coming up in March So, we'll see what that looks like in the next call but.
But certainly with the threat in the Pacific.
It is clear <unk> is clear and so on I'm not seeing any slowdown in that consulting arena.
Period, So I think.
All positive Mike I don't like when I say things are honored.
100% positive in these questions because it sounds like it.
Are you optimistic.
Truth.
<unk>.
And as you know it's always a good idea just to tell the truth.
No. We appreciate the candor thank you Stuart.
Thanks.
Thank you. Our next question comes from Tobey Sommer of curious Securities Tobey Youre line is open. Please go ahead.
Thank you I Wonder if you could speak to fts margins over the next few years.
With the additional scale of hitting the revenue targets for 25, a couple of years. Early there is also opportunity for margins or maybe better described all in profitability to be better than prior expectations over a multiyear period.
Yes, I think we've kind of a bit last quarter. Because we were we were performing above expectation of course that resulted in <unk> <unk>.
<unk> hundred 22, and our outlook for 'twenty three and beyond.
Youre, probably right, we had set out to move margins up over time, 1% to 2%.
Each year, reaching by 'twenty five something in the high teens and I think that right now we can see a path to high teens and certainly low twenties.
As Mark said as we as we scale and the mix changes I think there is absolutely a pathway to do that for sure.
But I will reiterate we're standing behind our 475 target in 2025.
And I think the beauty of that is we've got multiple pathways to get there.
Obviously, the commitment to the capital deployment strategy as part of that but I think just the business resilience and the levers we can pull off.
We're not a one trick pony.
That's really really really really important.
The world today.
And my follow up is could you remind us of the industrial logic.
For both of these segments to reside within the same company.
Thanks.
Yes.
I think that industrial logic, we've touched on many many times I think we are seeing an increasing symbiotic relationship between them.
We report in segments, because the market demands that we do that.
But the people that we move across between the business units from GFS to Sts or even within GFS or whatever is substantial.
And we move key capabilities all the time every day.
We're not sort of looking at and we've talked about this before things like the future of hydrogen much will depend on the management of hydrogen and the capability set that sits with that sits in NASA.
Right now for us.
If you think of storage and utilization of hydrogen and whether that sets we're seeing.
The department of defense setting a net zero commitment.
They've got to get there and I think our.
To help them get there is obvious.
And so I do think that there is a lot more behind the scenes that we probably need to do a better job of us explaining but but but I have to say I think.
We're seeing more and more coming together of these businesses over time more sharing of capability.
Bringing bringing expertise and experience to bear for a solution.
And then having to of course countered by a couple of little bit to report from that video segments, because that's the way, we're structured and the way that we report so.
So.
Certainly be showing more on that as we as we progress.
Thank you very much.
Thank you. Our final question today comes from Brent Thielman of D. A Davidson Brent Your line is open. Please proceed.
Hey, great. Thanks, good morning.
Hey.
Might ask the STS upside potential question.
Slightly different way I guess.
I think that.
U S was still only a little over a third of the business in 'twenty, one I'm not sure where it flushed out in 'twenty two but obviously these incentives afforded by IRA related to hydrogen and then what seems to be yes, thats awareness around <unk> yet.
Given global supply issues are real tailwind here.
Thanks for the business.
What is the upside potential indicative of a much stronger U S market, you see coming or just simply add sort of a business as usual multi region approach that's been driving the business to date.
Maybe greater adoption here is kind of icing on the cake.
Okay.
I think the latter I think I think this is a global phenomenon.
Dominant.
It's a global market, we're seeing obviously, we talked about the middle East Eylea.
Seeing huge investment in attractive areas for KBR, but you are quite right I do think there is icing on the cake for the U S. I think.
The IRI Bill is really driving a lot of activity.
Sure.
I mean, there is abundance of gas in the U S of course.
We're seeing companies like Mitsubishi signed up in Corpus Christi to do to look at doing 30000 tons of ammonia.
And that's obviously to export back to Japan, because of the bond that we talked about earlier in Japan. So.
So I think we're going to see increasing opportunity in the U S, which obviously is our backyard.
But at the same time I think.
Our global business has proven that way for many years.
<unk>.
I think so.
One plus one scenario here not one or the other.
Okay I appreciate that and then just my follow up when would you anticipate including the full value of the home states and the backlog and then once that full transition occurs.
Yes, I think so and I don't think it will.
We haven't landed on that.
Yes, but.
The way that we book backlog is actually very conservative.
Typically backlog when it is fully funded.
Got levels of track records.
That gives us very good.
Visibility.
What will be liquidated on a particular contract. So so I think we'll I think more to come on that but I think that as we had said was at the end of the year will put we will put some of homes in backlog how much of that is I'm not sure whether it will be a year or more I don't know.
But a lot will get visibility obviously at the end of this year as to what we're going to do in 'twenty four and that will go into backlog at the appropriate time.
We may be due.
Some cadence around that to get confidence of where we're at and then and then we can we can.
Predict the future in a little bit pattern, but again I think it's better to be conservative there around and get over your skis.
Okay. Thank you Stuart.
Thank you. We currently have no further questions. So I'll hand back over to Stuart Brady for any closing remarks.
Thank you and thank you for all your questions. Thank you for your interest in taking the time.
It's a busy time with earnings so thank you for that.
Just to close I think the key message too to investors is that they all are.
Let's say the performance in STS.
<unk> growth, which was absolutely terrific.
The cash generated which really is part of our story and we've talked about that many many times.
Which gives us great confidence around our capital deployment strategy, how we're going to deal with.
With the convertible this year and how we are actually moving forward towards that 475, mark so with that ill.
Obviously, we've been talking to investors and analysts over the course of the next couple of days.
And that but thank you again.
Ladies and gentlemen, thank you for joining today's call you may now disconnect your lines.
Yeah.
[music].
Okay.