KBR Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the KBR First Quarter 2023 Earnings Conference Call. My name is Jaquita. I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Operator

I would now like to pass the conference over to your host, Jamie DeRae with KBR. Jamie, please go ahead.

Speaker 1

Thank you, Jaquita. Good morning, and welcome to KBR's Q1 fiscal year 2023 earnings call. Joining me are Stuart Brady, 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 year and then open the call for your questions. Today's earnings presentation is available on the Investor This discussion includes forward looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2.

Speaker 1

These matters involve risks and uncertainties that could cause 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.

Speaker 2

Thank you, Jamie, and thanks to you all for taking the time to join us this morning. Before we begin our earnings call, I am deeply saddened to inform you that Lieutenant General Vincent Stewart, U. S. Marine Corps retired. A very distinguished member of our Board passed away this past Friday, sadly.

Speaker 2

Vince has been a Director of the company since June 2021. And on behalf of KBR's Board of Directors and all of our employees, we extend our deepest sympathies To Vince's family, I'm personally very saddened by Vince's passing. He was a tremendous support of the company and me personally, and I will always be appreciative of his service and his impact to KBR. Now I'll start today's presentation on Slide 4. As you know, these are our Zero Harm Pillars.

Speaker 2

And today, I'd like to talk about our annual Zero Harm Day that actually celebrates all of the pillars you see on the slide. So on to Slide 5. So on February 22 This year, TBR employees from all around the world came together to celebrate the company's 8th Annual Zero Harm Day. Now this is an important and a significant day in the life of the company, which we celebrate KBR's outstanding safety performance and our sustainability culture throughout the organization. It's also an opportunity to really recognize our people for their zero harm achievements and their courage to care.

Speaker 2

Project sites, offices, business groups all around the world had Zero Harm Day events and there's And thousands of employees took part in a huge range of activities and there were panel discussions on Climate change on mental health, we had community leaders come in and experts come in to talk about Topics ranging from personal safety to recycling to giving back to communities, etcetera. And overall, it was a fantastic day of recognizing our accomplishments, but actually renewing our commitment and refreshing that commitment to our 0 harm culture at KBR. And of course, we carry on our 0 harm theme actually throughout Whole year, as you know. And recently, our Impact, our Young Professionals Resource Group came together on Earth Day for a day of giving back. And in Houston, they took part in a beach cleanup actually in Galveston partnering the nonprofit Galveston Bay Foundation.

Speaker 2

So Terrifically, well done to those aspiring leaders. So on to Slide 6, and we'll just talk a little bit about Some key highlights in the quarter and the, I guess, the business health of the group in general. Firstly, at the highest level, We've really hit the ground running in 'twenty three. Our people continue to perform. It's absolutely outstanding day in, day out, and I really wish to thank them personally For all that they do, doing things that matter 20 fourseven.

Speaker 2

So staying on people, on the top left, you will see that already this year, Our headcount has actually increased by 7%. That's quite a jump, and almost all these roles are billable. Attrition has come down and it's kind of stabilized at normative levels, which is really helping. And obviously, our increased focus on retention And recruitment is paying off. So a big shout out to the folks in the HR function there, really terrific work.

Speaker 2

I mean as a services business, The employee numbers are not the only measure of growth, but I think, of course, they're a solid indicator. I did want to highlight in this section today a program We came across from the Centauri acquisition that we really identified as best practice at the time, and we've now broadened that to the whole of KBR. And this is our Tech Fellows program. Now this program takes nominations and then identifies and celebrates our leading technical gurus.

Operator

I mean,

Speaker 2

I think this, of course, shows the value that KBR places on technical excellence. I mean, many of those these fellows are actually world leaders And I have to say they are typically absolutely brilliant and excellent mentors to our people coming through. I mean, this also provides a community and a forum to really innovate and to collaborate in sort of key topics So really very important for our government and the world in general. We give additional budget and, of course, additional time So that they can invest in their chosen passion. So really, really important program and I think again really highlighting our commitment to technical excellence.

Speaker 2

Moving to our ESG program, 0 Harm. I'm pleased to report that our Q1 HSSE performance continues to be Top quintile, so terrific. I mean, you can see the numbers there, but remember, as I always say, good safety is good business, so terrific performance. From a shareholder value perspective, in Q1, we were awarded 3 green ammonia projects. Now these are different levels of maturity, and I think we've announced each of them separately.

Speaker 2

But it's nice to see when you put them together, I think it really tells the market story and really our position within it. Obviously, this was on the technology IP side of STS. On the sustainable services end, we also announced that we've been awarded BP's hydrogen development work. And now with this, we're working in an integrated and Elaborative framework with BP, and I think this through time will come with pull through opportunities, think project management, engineering, technical authority, over a number of years. And BP has actually made a public $30,000,000,000 investment committee in hydrogen going forward, so super exciting.

Speaker 2

Moving to the bottom left, I'll touch quickly on business growth. We were awarded $3,100,000,000 in the quarter, which Took our backlog and options up to circa $21,000,000,000 But importantly, the book to bill for the group was 1.4 With GS at 1.0 in what is typically a slower quarter and STS at 1.9 on a trailing 12 month basis. I mean, I think these are terrific indicators of our continued momentum for 'twenty three and, of course, towards our 'twenty five targets. And I think the other key takeaway from this section is that we're feeling really, really good about 23% in general with 85% of our work Now under contract. That's really a high level for this time.

Speaker 2

Touching on the financials, again, at a high level. Obviously, Mark will dig in a bit in a moment. But excluding OAW, our revenue was up an impressive 18%, 18%, with margins also up 170 bps to 11%. Cash was positive, albeit seasonally low, plus with cash out events like comp payouts, etcetera, in Q1, These were all as expected, and our net leverage now stands below 2.0. So really strong balance sheet.

Speaker 2

Although we beat consensus by a fair amount, we have resisted increasing guidance this quarter. I guess we kind of want to see how the rest of the year plays out. But with 85% of our work secured and with a strong and active pipeline, I will reiterate that momentum is really good. Now on to Slide 7, and we'll just touch a little bit more on markets and some of the award and the momentum that comes with that. So Slide 7.

Speaker 2

So starting on the left hand side. The market across sustainable technology continues to be really buoyant, And it lines up nicely opposite our suite of offerings. Now we spent quite a bit of time on STS last quarter, and the market drivers that we talked about then still hold today. So I won't really go over this again. But our book to bill in the quarter once more outpaced, And we've highlighted a couple of key wins on the bottom left.

Speaker 2

Phase 2 of Plaquemines was given the green light, a great wine A great win in sustainable services. And directionally important, we also secured our first plastics recycling module on the IP side of the house. I think this demonstrates these projects are now moving into the next phase, the execution phase with proprietary equipment orders. So clearly, more to come in this area. There are a few key pieces of info on top of what's on the slide.

Speaker 2

The trailing 12 months book to bill excluding, So without Plaquemines was 1.6. I just wanted to put this in context to demonstrate how well the whole portfolio is performing. In Q1 alone, we secured 7 ammonia awards. 3 in green ammonia I highlighted earlier, plus 1 blue and 3 gray focused on additional capacity. So that's 7 ammonia stroke hydrogen driven projects in the quarter.

Speaker 2

The projects are in different phases, but the key takeaway here as it's a clear signal to the growing demand across the ammonia hydrogen markets that we have been highlighting for some time. Another key takeaway is that there is a growing mix of long term contracts in the STS portfolio, which I think should really serve us well into the future. So Plaquemines, BP Hydrogen and the recently announced win for Equinor in Canada are all really good examples of this. So all are multiyear, Giving us greater visibility and quite a bit beyond 2025. Backlog in STS is a touch under $5,000,000,000 which is circa 3x annual revenue, so really good shape.

Speaker 2

Now on to Government Solutions. Again, the market fundamentals are similar to what we described last quarter. Tensions in Europe and geopolitically in a global context continue. Now this is driving increased activity both domestically and overseas in a number of our business areas, but obviously and more noticeably in Readiness and Sustainment. The defense budget, albeit a little bit or a long way to go to formalize, is directionally favorable and lines up nicely opposite where KBR has positioned itself.

Speaker 2

Space budgets are also up in civil And significantly in military space, again, a very nice fit for us. And Mark will cover later our great performance in our space business, which reflects this increased activity. And as I have stated previously, our military space business, which actually sits inside our defense and intel Internationally, the increased peer threats are driving closer cooperation across the Western allies, AUKUS being a great example of this, And there's increased activity, specifically in the advisory consulting arena where Fraser Nash lives. In what is traditionally a very slow bookings quarter, I think we are pleased a bit with a book to bill of 1 .o. And this does not include the recently announced Holmes 3 award for NASA, where KBR is a minority joint venture partner, but To give you a scale context, we'll add circa 100 people to execute our work in that program.

Speaker 2

Overall, that OMS III award is approximately $700,000,000 takeaway that we'll book our share of in Q2 or Q3 depending on protests. And our book to bill does not include anything for HomeSafe Yes. Just on HomeSafe, the transition work has passed 50% complete, so we passed that milestone. It's all going very well, and we've made very good progress on the commercial side as we head towards our first moves later this year. There were multiple awards across all our business segments that drove the book to bill performance, including increased task orders in LOGCAP In the U.

Speaker 2

S. And in Europe, some good awards under IACMAC and the 10 cap contract frameworks, Several high end R and D awards, meaningful on contract growth in our larger programs, increased activity within our Intel portfolio And numerous consulting assignments. Now I think this really demonstrates the value of the KBR business model and where we sit in our markets, And it kind of ensures that we can go after the big fish, but we don't rely upon them. And you may have seen the new space suit that was Earlier this year, Acxiom is the main contractor, but as you will know, we're a key design partner behind this exciting program. So that's pretty cool.

Speaker 2

And staying with NASA, and a huge shout out to our team as they were awarded the Supernova Award. Now that's the highest safety and excellence award Bestowed by NASA, so quite a big deal. I mean, an absolutely bang on a zero harm value, so a great, great win. Overall, I would say the feedback from the business as the award activity levels have gained momentum through Q1 after a sluggish start at the turn of the year, which I think bears well for Q2 and Q3. So in summary, Overall, our momentum continues with multiple market factors favorable.

Speaker 2

Our mission focus and delivery It's absolutely top of mind, and I think you see that flowing into our results across the company, and we're feeling really, really good about our start in 2023. So With that, I'll now hand over to Mark, who'll dive into the numbers and segment performance a bit more. Mark?

Speaker 3

Great. Fantastic. Stuart, I'll pick up on Slide 9. So as you just heard, we're off to a terrific start for 2023. We're really pleased to see that.

Speaker 3

We're seeing strong P and L results from both businesses, underpinned by excellent project execution and also tapping growth opportunities Top line tipped $1,700,000,000 which is up 18% on an ex OAW basis. Just as a reminder, OAW was the large episodic humanitarian effort that we supported in 2021 2022, And that contributed about $300,000,000 in revenues at the beginning of 2022 as it was winding down. So that's a comparable that we're seeing. 18% growth ex OEW is quite impressive. It's fueled by both segments and I'll cover those here in a second.

Speaker 3

Profit margins were excellent at 11% of revenue with EBITDA growing to $182,000,000 up 18%. And not shown on the slide, EBITDA was up circa 30%, three-zero percent, excluding OAW, which demonstrates terrific margin expansion year over year. Fantastic. This level of EBITDA is a high watermark for quarterly operating profit for the new KBR. Margins of 11% were driven by both segments where STS surpassed 20% And government profitability continues to perform consistently at the targeted 10%.

Speaker 3

The strong EBITDA coupled with normative below the line items produced adjusted EPS at $0.67 a share. With such strong performance in Q1, particularly in STS, we're ahead of pace for 2023 and we'll keep you posted on this as the year unfolds. As for cash flow, results were as expected. Cash is usually low in Q1 due to incentive payments, and this quarter was also affected by the $25,000,000 headwind From early collections we had back in Q4 and also some other timing items. In addition, working capital demands went up due to the strong sequential growth we saw since Q4.

Speaker 3

We expect to get back on pace in later quarters this year. And on a positive note, we collected the 2nd and final installment of the Ichthys settlement of $90,000,000 A really nice boost to treasury in the quarter. Now I'll go to Slide 10 for more color on the 2 segments, And starting on the left, STS revenues were up almost 50%, all organic, Amazing. This reflects everything we have been saying, technology offerings that are helping the world become a greener place, Capabilities which are helping stabilize the global energy security challenges and a world class team executing its business extremely well. We're seeing strength and growth in all verticals within STS, ammoniahydrogen, Olefins, clean refining, plastics recycling and sustainable services all involved in enabling really important projects all around the world.

Speaker 3

With all of this going on, the team keeps a keen eye on the longer term as well. We always have sought to identify new technologies in this space, then acquire them, make them better and leverage them across our global installed base with a highly effective sales team. In Q1, we added sustainable aviation fuel with Swedish Biofuels, Acetica for carbon capture usage and ScoreClean for 0 carbon ethylene cracking using hydrogen burners. Acquiring and developing technologies in this fashion served us very well leading up to the strong market conditions and the performance we see today And continuing to do so helps drive STS in being both a short term and long term growth story. EBITDA for STS blossomed to $82,000,000 with margins increasing from 17% to 22%.

Speaker 3

This profitability strength reflects good license mix, economies of scale and favorable closeouts on strong and consistent execution. While not provided here, and as Stuart said, book to bill for STS was an amazing 1.9x Ex TTM, but was actually 2.2x in the quarter, continued demonstration of the attractive end market conditions and leadership positioning that we see in this business area. Now over to Gov. Revenues grew 12% exoaw also reflecting good market conditions and having presence in areas in greatest need by our customers. While not on the chart, it was really good to see the strong sequential growth from Q4.

Speaker 3

Specifically, all four business units grew Within GS, meaningfully since Q4, together up about $75,000,000 or 6%. Growth was driven by our Readiness and Sustainment, Defense Systems Engineering and Science and Space Business Areas, The pockets of international also doing really well, such as technical consulting. In Readiness and Sustainment, the majority of this business reflects long term recurring base operations and supply chain programs serving the armed services community all over the world. This includes stable support for the European Command and the Northern Command under LOGCAP 5, we've talked about that a lot. While that is all indeed firmly in place, our customer has also added substantial increases to support The Allied effort to support Ukraine and overall security in Europe.

Speaker 3

We expected quite a bit of this in the 2023 plan And with high confidence, this will endure through the year and probably beyond. We'll certainly keep you posted. Science and Space grew 10% year over year, so kudos to Todd, Lori and the team on this. It's fabulous. Our operations focus has benefited from increased NASA and commercial space mission activity Plus military health work that we do in this business unit.

Speaker 3

This team also continues to receive stellar award fee scores, demonstrating superb service to the mission as it always does. Our work here continues to drive enormous pride across all of KBR. Margins for GOV came in at 10% consistent with target and also recent performance. On to Slide 11 and capital matters. So with strong EBITDA growth, net leverage registered down And finishing at 1.9x for the quarter.

Speaker 3

Last year, we signaled being cautious with debt in light of the interest rate environment, And we are indeed executing that strategy, but we're also still deploying meaningful cash for tuck ins and returning capital to shareholders. M and A is selectively in play. And as discussed earlier, we added a couple of new technologies in STS this past quarter. In addition, buyback pace was kept strong at $50,000,000 in Q1, plus another $11,000,000 for benefit plan offsets. And finally, in Q1, we were opportunistic with the swap curve and bumped up our fixed to float ratio to about 90%.

Speaker 3

This will drop down 5 to 10 points when we retire the convertible securities later this year, this fall in particular. The average interest rate for our current debt stack is around 4%. The combination of high fixed to float percentage And the low average rate provides significant stability in the interest outlook relative to driving toward our 2025 financial targets. And finally for me on Slide 12, our forward outlook. Just quickly with an excellent Q1 and with 85% of our outlook under contract, we are affirming the 'twenty three guidance for all measures.

Speaker 3

The strong start also shifts our weighting of earnings contribution over the course of the year. We're now looking at a $48.52 split of EPS first half to second half. Thank you. So I'll turn it back over to Stuart to finish it up.

Speaker 2

Thank you, Mark. Terrific job as always. And my final slide today is Slide 13. I'll just touch on a couple of key takeaways. I think in summary, Absolutely terrific start to the year, sequential growth in all business units, margin expansion, adjusted EPS ahead of pace, Really, our people are truly delivering significant value to our stakeholders.

Speaker 2

Book to bill was excellent at 1 point 4x on a trailing 12 month basis, and more importantly, the quality of what we're winning and the associated earnings are in key strategic areas. Work under contract is now 85% for 2023, And this is a very solid position to be in after Q1. We're very well positioned in attractive markets of the future, And I think our recent wins really demonstrate this. And thus, we remain absolutely committed to our 2025 targets. So thank you.

Speaker 2

And I'll now hand back to the operator, Jaquika, who will open the call for questions. Thank you. Absolutely.

Operator

If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star 1. Also, please limit one question and one follow-up. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your The first question comes from the line of Bert Sison with Stifel. You may proceed.

Speaker 4

Hey, good morning and thank you for the question. Thanks, Blair. Stuart, maybe just

Speaker 5

a follow-up to some of

Speaker 4

the comments on SCS. How should we think about the sustainability of the current demand backdrop? You noted several material wins over the last couple of months, I think the concern is if the global economy does start to head lower, ultimately you could see some mix shift away from some of the licensing activity you've been doing back towards services And that could lead EBITDA down. Is there a concern or any concern like that in the near future? Or do you think the High book to bill and the pipeline give you a pretty good runway on when you're thinking about your EBITDA growth?

Speaker 2

Yes. We're certainly no seeing no signs Of that, I think the latter, I think, really are book to bill and activity levels in our pipeline in the licensing side and the IP side of the house Are also driving that performance. And on the sustainable services side, the margins we are tracking there, given the high nature of what we're doing And the capability we have in that arena are also very attractive. So we don't see any margin pressure downwards At the moment, we're sticking to a guide, of course. And so I think it all bears well looking forward.

Speaker 2

And as I said earlier, I think one of the key takeaways, which is A little bit different dynamic we're seeing in STS as we're being locked in for the quality of our resourcing into more longer term programs like the BP Hydrogen work. So I think that really gives us better vision into the future than we probably historically have had in that business area. So It's a really good mix at the moment. We're feeling really upbeat as you can tell.

Speaker 4

Okay, great. Maybe on the other side of the business, You guys mentioned in your release that foreign contract growth in Government Solutions has been a tailwind with clients and space trending better. I think the expectation was that segment would be a little Slower growing this year, but now you have that benefit paired with a nice JV win at Goddard Space Center. As that Trajectory, it looks like it's improving. Do you see a path to perhaps the higher end of the 5% to 8% core growth in Government Solutions this year, obviously,

Operator

Excluding OAW and HomeSafe.

Speaker 2

Yes. I mean, I think Mark commented on that. I think the sequential growth across all the business areas in Government was 6% from Q4 into Q1 of this year, which was a terrific indicator of how that business is moving. I think we'll give you more color as the quarters unfold. I think in Q1, it's a bit bold to be getting out over the skis with that statement, I think.

Speaker 2

And we've done terrifically well with 18% year on year growth ex OEW and long may that continue, but That's a high watermark in anyone's book. So I think that's probably the best I can give you on that. But we're feeling pretty upbeat about the market and where we sit.

Speaker 4

Great. Thanks, Stuart, and congrats on the quarter.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Jerry Finch with Goldman Sachs. You may proceed.

Speaker 6

Yes. Hi, good morning, everyone.

Speaker 2

Good morning, Jerry. Hi, Jerry.

Speaker 6

I'm wondering if you could just expand on the Sustainable Tech Solutions performance in the quarter. It feels like that was Ahead of plan, can you just talk about what was the benefit of favorable closeouts versus things that we're seeing flowing through that will continue Yes, into the Q2 plus.

Speaker 2

Yes, I think our long range targets remain as they are, Jerry, at sort of High teens in the margin side, and I did comment that we think that business could get into the low 20s, and I think we're seeing that In various quarters. So I think we're doing extremely well, and our folks are delivering. We seem to have quite favorable closeouts of projects on an ongoing basis. And I think Q1 was No different in that regard. So I think the key takeaway there is that we are ahead of pace.

Speaker 2

Think the book to bill shows the continued activity in that segment. The team is doing an outstanding job, as Mark remarked in his prepared remarks. I think That team globally is doing terrifically well and really delivering for our customers and thus for our stakeholders. So I think that's probably The best way to describe how that business is performing and obviously as the year shapes up, we'll give you more. But I think, I mean, so far, We're very much well targeting our guidance.

Speaker 6

And so the reason for the question is the discussion This morning is around whether given the sharp beat driven by STS in the quarter, there should have been a positive guidance revision because without it, it looks Like the guidance is below consensus in coming quarters. Can you just expand on that point? Is it just too early in the year given the debt ceiling discussion, etcetera? Or Just say more, please, if there are any parts of the business that we should be thinking about as potentially having a negative variance?

Speaker 2

So there are no parts of the business with a negative variance. I'll say that right after that. I think the And I get your question on consensus when you add it to the quarter one performance. But I think we're still well within our guide with the consensus numbers each Quarter plus Q1, albeit not at the middle of the guide. I'll give you that.

Speaker 2

And it is early in the year. And As we come back in Q2 and Q3 and the business continued to perform, we cut, we perform, We will review where we are in our guide, but that's kind of where we sit. We're still with consensus still trending within our guidance range.

Speaker 6

So it sounds like we're towards the high end just to put the pieces together?

Speaker 2

Well, I think the math would tell you that, yes.

Speaker 6

Super. Thank you.

Operator

Thank you. The next question comes from the line of Jamie Cook with Chris Lee. You may proceed.

Speaker 7

Hi, good morning and congrats on the nice quarter. Sorry to Follow-up again on the STS. Obviously, a great EBITDA performance. Do we think about it? I mean, it had a nice Jump sequentially in terms of EBITDA, is the 80 some million, is that the run how we should think about the run rate over the next And then could you just congrats on the Plaquemines II award.

Speaker 7

Can you just give a little color sort of on the size of that, the scope of work you're doing relative to the first contract sort of when that starts to kick in? Thank you.

Speaker 2

Yes. Thanks, Jamie. The I mean, I think the $80,000,000 plus this quarter did benefit with, as we said, some project closeouts On the mix, we've given a guide very clearly of $300,000,000 for the year in STS, and we intend to do that. With a fair win, we may do a little bit better, but there's no commitment there. I think $300,000,000 is the number we're targeting.

Speaker 2

And to be honest, if we deliver that, we're 2 years ahead of pace. And remember the characteristics of that business with its Negative working capital and things, it's a terrific business. So all good. In terms of Plaquemines, the first phase was 13,000,000 tonnes or so with all the associated infrastructure to support 20,000,000 tonnes. And the second phase is for the balance, The 7,000,000 tons of LNG.

Speaker 2

So that's the way to think about it. In terms of scale, it's like Well, for us, about $800,000,000 $700,000,000 going into the backlog. But one of the things I was Keen to point out as on a trailing 12 month basis that additive backlog when you look at the rest of Yes, we still achieved a book to bill of 1.6, so excluding Plaquemines. So the whole portfolio is doing tremendously well. But I do think the other as I said earlier in the questioning, I think the other change, I think, Jamie, is the long term nature of some of these contracts that really underpin future

Speaker 7

Okay. Thank you. Congrats.

Speaker 2

Thanks, Timmy.

Operator

Thank you. The next question comes from the line of Sean Eastman with KeyBanc. You may proceed.

Speaker 2

Hi, James. Nice start to

Speaker 8

the year. Just quickly wanted to start on a clarification one. If we zone in on this STS Kind of outperformance on margins in the Q1. Are we looking at outperformance on the core licensing Business or are we seeing closeouts on the legacy portfolio in that number?

Speaker 2

It's probably not so much some legacy, Sean, but not too much. I mean, we've got Ongoing services contracts. We've got ongoing, I guess, technology projects that we close out progressively. And As we close those out, we retire risks and when we retire risks in our favor, we book the upside and that's an ongoing Part of that type of business and I think if you're prudent then you get the upside and if you're conservative then obviously you get no downside surprises. So That's kind of how we manage that business.

Speaker 2

So I think it's a mix there.

Speaker 8

Okay. Thanks, Stuart. And then just relative to the debt ceiling negotiations, I just wanted to understand how The KBR team is thinking through scenarios and risk factors there. I mean, is there sort of a simple explanation For The Street here on how to think about the debt ceiling risk?

Speaker 2

Yes. I mean, it's some things are well, that whole negotiation is totally out with our control. But the way that we think about it is that We've got certain attributes within KBR that are very different to perhaps some of our peers. We've got the STS business, got nothing to do with that debt ceiling, as you're aware. We've got the international part of our government business similarly that's out with it.

Speaker 2

And we're positioned very much at the operational end of what we do for government. We've talked about this often. The things that are happening in Europe will not be switched off. They just can't be given the circumstances there. What we're doing in Space can't be turned off because of the things we do there, etcetera, etcetera.

Speaker 2

So we've also got over half of our GS backlog, as you know, in long term contracts that are As you know, in long term contracts that are funded, so we're feeling pretty good about a lot of that. So we've got certain attributes that we think We're very well positioned opposite these key priorities. So I think the debt ceiling piece aside, I think We've talked about inflation risk before and how we've managed that. So I think we've come through that very strongly. We've seen the shifts on And really throughout geopolitical risk.

Speaker 2

And again, I think we're well positioned there to be resilient. And I think that resiliency word hopefully is Resonates with the investment committee on KBR today just because of the attributes I've just described. So we've also positioned our business in very Strong cash generative areas of the market. And I think, again, you can see our leverage and where our balance sheet sits. And the Treasury team and Mark have done a terrific And job in sort of derisking that element and given uncertainty with the swaps that Mark described.

Speaker 2

So I think all up, we've We've derisked the balance sheet. We've derisked the outlook, and we're in attractive markets with a very long book of business that gives us more transparency than most into the future. And with the attributes of STS and GSI with the U. S, I think That gives us certain factors that are very positive in that regard.

Speaker 6

Makes sense.

Speaker 8

One last quick one from me. Last month, we saw this Australian Defense Strategic Review come out. It seems like there was some moving pieces there, some reprioritization of spend being discussed. We weren't really sure what to take away there. So just curious on KBR's take on that one.

Speaker 2

Yes. It's just come out. We're still sort of digesting ourselves. Sean, obviously, there's a lot of focus on AUKUS and the Navy in general, which we're very well positioned. Opposite that, we're also strong in things like Mission IT, which Obviously, it's all well funded going into the future.

Speaker 2

There will be some reprioritization, so we'll probably have to come back to you on that. But I don't it's not certainly changing our guide or our outlook.

Speaker 8

Understood. I'll turn it over. Thank you.

Speaker 2

Thanks.

Operator

Thank you. The next question comes from the line of Andy Kaplopoulos with Citigroup. You may proceed.

Speaker 9

I guess close enough.

Speaker 10

How are you doing guys?

Speaker 11

Hey, Andy. Hi, Andy.

Speaker 9

So Stuart or Mark, you mentioned the 7 ammonia awards in Q1 and the Hyundai plastics recycling modular plan Help you deliver that sort of 1.6 times trailing 12 month book to go ex Plaquemines, which seems like maybe even more of an acceleration in those Key markets in the quarter. Is that the case? And does that mean you can sustain sort of that 1.6 times that you've achieved ex LNG moving forward?

Speaker 2

Certainly, the market would we feel pretty good about the market and the pipeline. And Obviously, it's been a month or so since the end of the quarter, and we're not seeing any of that slowdown. So I think that will be as well going forward. Can you achieve that exact number every quarter, Andy? That's difficult to predict.

Speaker 2

There'll be some ups and some downs and all of that. But I think overall, The key message and the takeaway is we've got a very strong backlog already secured in STS and With the whole group over 85 percent now, I think we're in pretty good shape for 'twenty three and a lot of focus is obviously booking business as we move into next year already.

Speaker 9

And then Stuart, I think last quarter you had talked about Navy awards in space starting to sort of You're watching for an acceleration in working space and maybe we're seeing that. You mentioned a 10% growth in space. Does that have anything to do with sort of the ARTEMIS Program progressing, like what do you see for that particular area? And then I'd ask you the same thing about European Command. It seems like You've been expecting the revenue step up there, but it seems like it's now coming in 2023.

Speaker 2

Yes. Sanjay, the Artemis program and the flow through of our existing contracts, I think that's what's driving the on contract growth there. As Mark also said, the health side of the services media is also seeing quite substantial on contract growth. So It's all going, which is terrific. And that obviously doesn't include the military space piece I touched on, which sits inside our intelligence portfolio.

Speaker 2

In terms of what's happening in Europe, I think that ultimately That program in EUCOM has moved away really from contingency funding as OEP into European Command O and M funding, which I think directionally sets the tone that we think this is going to be more enduring than less. And so I think there's probably more stability around that. But you're right, we've seen growth from sort of last year to this year about And our forecast about $75 a quarter.

Speaker 10

Appreciate it guys.

Operator

Thank you. The next question comes from the line of Steven Fisher with UBS. You may proceed.

Speaker 11

Thanks. Good morning. I just wanted to follow-up on the guidance discussions earlier

Speaker 12

in the

Speaker 11

Q. I know it's early and you don't want to get over your skis, but I'm just wondering what are some of the key things you're looking at to update guidance or Uncertainties that might be resolved, is it just time or is there any risk on the debt Sealing discussions in your mind shifting around timing of awards? Is it maybe something with this European command that Maybe troops could get pulled quickly. Anything kind of more specific you're looking for that's an uncertainty that you're looking for to be resolved?

Speaker 2

Not really, Steve. I think that it's a time issue. We just want to get a few more months under our belt. And As you know, we're quite conservative. We and I think that's prudent.

Speaker 2

And we've derisked a number of factors. I've touched on them already. I won't Going to the mall, but obviously things like our capital situation and where we sit with sort of interest rate risk and things like that has all been mitigated and We've secured some work potentially to deliver. And I think I mean, people often forget you've got 85% of your work under contract. But ultimately, in a normal year, we get a number of things that are small and they make up 15% to 20% of our revenue base, and we don't know what they are until they hit or a few weeks out before they hit.

Speaker 2

So we're feeling pretty good About the year. So it's more about time and just solid execution and a focus on delivering for our customers. And I think if we do that We've got a few more months under our belt. I think we'll be talking about this again, I'm sure, next quarter on Q3. So So it's really

Speaker 11

time. Got it. And then curious what you're seeing in the M and A pipeline and to what extent does your Converged settlement later this year impact any M and A motivations or how does that convert also affect your buyback motivations as well?

Speaker 3

Hey, Steve. Mark here. M and A pipeline is Fairly consistent. I wouldn't say there's a major trend one way or the other. There's always things happening in government.

Speaker 3

And as you see and we're really pleased to execute a few additions On the STS side, which doesn't happen very often, small but potentially really important in the long term as we continually tech refresh that business. Relative to the balance sheet, we did say very clearly in our last call, less so this time, but nonetheless remains our number one capital priority This year is to settle the convert and get that behind us and that does involve a meaningful amount of capital, circa $600,000,000 at this stock price starting today at least. And so we do need to build the treasury for that. We do have adequate liquidity to take care of that and do tuck ins. And don't be surprised if you see those.

Speaker 3

But Otherwise, the priorities are very clear and unchanged, and we do remain constructive on M and A as opportunities present themselves.

Speaker 12

Perfect. Thank you.

Speaker 2

And I think in terms of buybacks, Steve, we've started the year with a Strong cadence. I think if you look back to Q1 last year, we were slower at the blocks. And we're committed to that, the capital deployment and the 25 targets. And Obviously, once we get through the conduct later this year, that will free up liquidity to sort of fulfill on that promise.

Speaker 11

Thanks Stuart.

Operator

Thank you. The next question comes from the line of Ghanam Khanna with Cowen.

Speaker 12

Hey, thanks guys. Good morning.

Speaker 2

Good morning, Gautam.

Speaker 12

Hey, I wanted to ask about HomeSafe and just make sure I understood. So you mentioned you've transitioned over half. If you could just talk about if your expectations are the same as they were With the $500,000,000 every 6 months increase and how the phasing will be in 'twenty four and in 25, what do

Speaker 3

you think peak rate will be?

Speaker 12

And then if you could also talk about how would it hold up in an extended CR,

Speaker 3

like let's just say we had for some reason a budget continuing resolution for all of next fiscal year of the government. Would the program be impacted at all, the ramp? Thank you.

Speaker 2

No, I don't think the ramp will be impacted at all. I think That's an ongoing commitment today and that will continue into the future growth. We don't see any impact with CR and The HomeSafe program. In terms of the ramp, we have said that as we head towards the end of this year, we Hope to get some moves under our belt and the ramp will go up quite significantly into the summer of next year, which is the domestic busy period. And so that ramp will be quite marked, I think, into Q2 and Q3.

Speaker 2

And then we'll probably come off a little bit, the international moves will then pick up at the end of the year and into the Q1 or the following year. So I think that's the sort of ramp and We reckon it will be as we know, it's a $20,000,000,000 program over or the ceiling value over 9 and a bit years. And That math with, I guess, inflation will mean that the cadence might be a little bit above $2,000,000,000 in total. And but I think as we get closer to the end of this transition period, I think only then can we really truly come back and give you More accurate data around that, but that's the way to think about it just now and your models. And I think the margin, we've kind of Resolved the as you know, we've got inflationary protection in the contract with CPI adjustments, and we've dealt with that with the government now.

Speaker 2

That's For this kickoff period, so I think that's the good news. We get to revisit that next year again, of course. So at least the revenue basis is clear and now we're working on the supply chain side. So we should be able to come back to you, obviously, well before the end of the year with sort of Our true margin expectations as well. So you just have to give us a little bit more time, Gautam, but that's the kind of thinking at the moment.

Speaker 3

Thank you.

Operator

Thank you. The next question comes from the line of Michael Dudas with Vertical Research. You may proceed.

Speaker 5

Good morning, gentlemen, Jamie.

Speaker 2

Good morning. Good morning, Michael.

Speaker 5

So just to follow-up on some of your technology comments, I thought the plastics in the mirror order was Quite helpful. And ammonia has been quite visible and strong with your company and others as well. Are those two areas where we can see the cadence picked up on those opportunities? Or is it going to be more balanced than some of The more popular and more forward technology, especially on the emissions and the side on some of the legacy energy companies who are Really starting to lean into that moving forward.

Speaker 2

Yes. I think it's a bit of both, Mike. You're right, the cadence of awards in ammonia and I think they're actually getting that first module going with plastics recycling, I think, will obviously more to come on that. It's very Because obviously the volume increase is significant once you start to get into the execute phase with some of these developments. But as Mark alluded to, it's in his remarks also, it's we're seeing it in olefins, we're seeing it In greener refining or cleaner refining solutions and across our portfolio, it's really not one or the other.

Speaker 2

On the sustainable services side of our business, we presented that last quarter to show you the relativity and size of those bubbles that we presented, if you remember. And That side of the business that's really driven by decarbonized solutions around entity security is going extremely well also. So I think it's a combination and it's not certainly not a one trick pony. I think it's a multifaceted market driver And we're seeing it not just in one market either. It's a very global phenomenon, as you can tell from some of our press releases.

Speaker 5

And my follow-up is with some of the newer technologies that you've acquired recently, How the visibility are those early stage? Are those that we may see some more order cadence come through the next 6, 12 or 18 months, are they longer term plays? Like how do you guys think through when you're looking at these technologies? Is it to like kind of get closer to the Implementation stage or stuff or opportunities for KBR to kind

Speaker 10

of enhance and then really push forward? Thank you.

Speaker 2

Yes. I think each is a little bit they're both in reasonably early stages, probably well on all three interests. 2 we've acquired and 1 we've developed. I think the SAF, the Sustainable Aviation Fuel, we've been quoting The Swedish Biomass Company for a long time, and I think we've now obviously acquired the rights for that technology globally. And that's quite unique.

Speaker 2

It's actually been approved by DARPA, which is makes it more applicable to defense. And I think A strong synergy play there into the future as the DoD tries to meet its net zero commitments. But it's also quite unique because it's a true drop in Solutions. So what does that mean? It means you can actually just physically drop it into a tank of existing Aviation fuel and that will work.

Speaker 2

And so you don't have to do a lot of work or preplanned and all the things that you have to do with some of the other solutions. So But it's still early, but we think its attributes are very, very exciting. And certainly, we know directionally in places like Japan, The government have legislated that 10% of all refined products now have to be sustainable aviation fuel. We've seen many airlines come out with partnerships and things that It's driving that market and certainly, that industry is under pressure to be more sustainable going forward. And The people who use those services and the investors and those stocks are also demanding that.

Speaker 2

So we do think it's an exciting Potential for the future, but I can't give you other than its attributes, I can't give you any numbers yet to support that. But it's exciting. And of course, we've got A hugely strong track record of commercializing new technologies, and we've got a very strong global sales force to affect that. So I think it's directionally really exciting. And I think similarly with acetic acid, acetic acid is actually Something that hangs beside what we do in ammonia.

Speaker 2

It's a different product stream. And the beauty of that particular technology is it consumes CO2 in the process. So it's going to be attractive just from that attribute that we can actually take CO2 out and actually use it as a consumable. So again, we think there are great opportunities for that as we go forward. And then the third is really looking at kscore.

Speaker 2

Score is our Olefins Technology and really we've done a bit of work trying to make that even more sustainable by introducing hydrogen burners as part of the So I think all exciting, Mike, all directionally terrific. And But which ones goes quicker and which one goes slower, I don't know. What numbers they deliver to KBR, I don't know, but I think it does position us well given the market fundamentals we're seeing.

Operator

The next question comes from the line of Brent Thielman with D. A. Davidson. You may proceed.

Speaker 10

Hey, thanks. Good morning. Hey, Stuart, I was curious on the comments about this growing mix of long term contracts And STS, I mean, Clack of Mines is pretty transparent. You talked about some others like BP. I guess I'm just curious if you see more of a trend where And a larger portion of future revenue in this segment will be secured by long term contract arrangements maybe versus The shorter sales cycle solutions, I think, have represented more of the business.

Speaker 10

Is that the direction of the market, more of a strategic initiative? How do you see that Going forward.

Speaker 2

Yes. I think that's exactly right. That was the point I was trying to make. I do think directionally, we're going to see more of that. I think As that market gets busy, I think we're not going to jump from one opportunity to the next.

Speaker 2

We're going to be strategic, Particularly with our customer choice and the sort of work that we do and the quality of earnings that's associated with that. But with that comes key people, And I think locking in resources is all part of the attractiveness of these longer term arrangements. And as a consequence of that, I do think Given the activity levels in the market, you'll get to see more of that, not just with us, but I think with us for sure and where we've positioned, I think that's going to be At the higher end, and I think you're going to see more long term contracts coming through the KBR portfolio and STS. And as I said, that's really what we're seeing today. And I think that the customers are very well funded, of course, and I think trying to get in front Of what they want to do from a sustainability perspective and look at their ESG goals, I think we can help them with that.

Speaker 2

And I think They want the people that helped deliver that. So trending wise, I think it's a very astute question exactly the message we're trying to deliver.

Speaker 10

Okay. And Stuart, Mark, I hate to put you on the spot with this, but obviously you're getting lots of questions about SKS and all the different Drivers within it. Is there a possibility, I know there's competitive factors to this too that we can see more of a breakout at Some of these different moving pieces within the segment just to understand financially where some of the implications are Kind of all these moving pieces within the segment, which all seem to be contributing in a significant way.

Speaker 3

Well, Glenn, are you asking about the logic of the 2 together or something? I kind of missed the second part of that.

Speaker 10

No, I'd just

Speaker 11

like to add

Speaker 10

more to ammonia, hydrogen, recycling piece, I mean there's lots of moving pieces within this business, which are all significant. I'm wondering if We could see KBR breaking out more of these pieces just to help the financial community understand it better.

Speaker 3

I think it's a great question. And as SPS becomes more prominent component of the picture, It is up to us to improve our communications here. And so it's a great business. There's lots of parts to understand. Things are always changing, fortunately for us For the better as conditions improve and we are committed to improving the communications there as best we can.

Speaker 3

You saw us show more in the last quarter and we'll consider or continue to evolve that as best we can. Breaking out components of a $1,500,000,000 business has some merit, but I think more scale would be helpful. And we're certainly on a great track to do that with the growth rates we see here. So stay tuned. It's a work in progress.

Speaker 3

The team's working very hard to execute and sell And maybe a little more time allocation to marketing might make sense someday, but I think we're doing the right things From a priority perspective in delivering these types of

Speaker 10

results. Yes. Understood. Very attractive asset. That's

Operator

Thank you. The next question comes from the line of Morena Perez Mora with Bank of America. You may proceed.

Speaker 12

Hi. I actually have Andre Madrid on for Mariana today. Thanks for I was just wondering if you can give a little more color on the free cash flow step up to the year. Just where you are at now, how do you expect to get $425,000,000 to $460,000,000 range for up cash flow.

Speaker 3

Yes. Thanks, Andre. Fair question. The number does stick out a little bit in Q1. And so, as I said, we did Expect a pretty low number in Q1 and that's exactly what happened.

Speaker 3

I mentioned timing items in my prepared remarks. We got the set of payments. We did have an extra payroll. We had some collections that went to the left and accelerated in Q4. So I mentioned those things.

Speaker 3

So we had quite a number of things going against us. We don't expect that To occur in future quarters and to some degree the opposite. So it is looks like a steep hill decline, but we've had very strong cash flow every year. The business model hasn't changed. We're capital light and we're going to work very hard to get those DSOs down and we've got about 5, 6 days to bring down over the course of the year, but team's focused on it and we didn't change guidance.

Speaker 3

So we're confident as such.

Speaker 2

Yes. And I think Q1 and Q4 are probably the lower quarters, Q2, Q3 being Seasonally, the higher quarters of typically 5 week seasons and things like that, but also lesser holidays in those quarters. So Yes. So we hope to make good progress into next quarter and we'll obviously update that.

Speaker 12

Great. Thanks.

Operator

Thank you. Thank you. There are currently no more Questions are waiting at this time. So I would now like to turn the call back over to Stuart for closing remarks.

Speaker 2

Thank you. Thank you very much. And again, thank you for joining us this morning. I'll be brief. I think we can all say we've got off To a great start in 'twenty three, I think lots of attributes with revenue growth, margin expansion, very strong book to bill And really just the absolute focus of our people on delivering, which is really driving amazing shareholder value.

Speaker 2

So With that, I will close, and I look forward to talking to a number of you as the day progresses. Thank you very much.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Speaker 2

Thank you.

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KBR Q1 2023
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