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spk05: and welcome to the KBR Inc. first quarter 2021 earnings conference call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question and answer session immediately following prepared remarks. You will receive instructions at this time. For opening remarks and introductions, I would now like to turn the call over to Ms. Alison Vasquez. Please go ahead, ma'am.
spk00: Good morning and thank you for attending KBR's first quarter 2021 earnings call. Joining us today are Stuart Grady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on the investor section of our website at KBR.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on slide two. These matters involve risks and uncertainties that could cause our actual results to differ significantly from these forward-looking statements. These risks are discussed in our most recent Form 10-K, available on our website. I will now turn the call over to Stuart.
spk02: Thanks, Alison, and many thanks for joining us today. I will start on slide four. Now, you should all be very familiar with our zero harm sustainability program by now and the 10 pillars that sit within it across the ESG spectrum. At our recent investor day, we highlighted that being a good corporate citizen was the floor and not the ceiling at KBR. And I wanted to pull on that thread a little bit more today. The symbiotic relationship between shareholder value and KBR helping our clients achieve their sustainability goals is an absolutely key differentiator for KBR. And we want to build on that just a little on to slide five. Now, KBR has a suite of recycling technologies that enable circular processing and the broader circular economy. At the investor day, Doug introduced Moora's revolutionary hydro PRS technology that closes the loop on the circular plastics economy. This is very exciting in its own right. And this excitement, I think, was compounded with the recent announcement that Dow is also investing and, importantly, committing to offtake. This obviously is a huge endorsement on the sustainability aspects and, of course, a huge endorsement on the technology itself and is an important step forward. But at KBR, we have many recycling technologies, as outlined on the slide. All are proprietary, differentiated, disruptive, and market-leading. Now, we could spend the entire call, and I don't plan to do that, talking about these technologies, but today I'll highlight just one example to give you a flavour, and that's on sustainable fibres. A global retailer from Scandinavia came to us a few years ago to help them solve a big problem, how to recover valuable chemicals and water from what would have been a waste stream at the end of their process to produce man-made fibres. A sustainable technology team applied a proven evaporation and crystallization technology to essentially recover and purify critical ingredients and water such that they can be reintroduced right at the front of the process, closing the loop on the circular processing. And this solution has many benefits, as I'm sure you can appreciate. It reduces processing cost. It saves finite elemental resources and water. And it eliminates a waste stream. So overall, it's great value for the client, obviously for KBR and our shareholders, and of course, the planet. So like you've heard me say before, advancing a client's ESG objectives is core to KBR strategy. And this example is just one of the many that demonstrates that tenet. So onto slide six and some key highlights from the quarter. The key takeaway here is overall revenue, EBITDA margin, adjusted EPS and cash were all in line with full year guidance and actually a little bit above our expectations for Q1. You'll recall that we stated that first half versus second half would be circa 40-60 split at the EPS level. That has now shifted to a circa 45-55 split with a couple of things happening in Q1 that were expected to happen in Q2 and Q3. And this was especially the case in sustainable tech, and Mark will give you some more details on this later. Margins were bang on at the group level with some discrete items, some puts and takes that Mark will cover later within the segments. But to be clear, full year margin guidance at the group and within the individual segments is not changing. And I'll say that again, the Q1 puts and takes did not change full year margin guidance. Pre-cash conversion at over 100% was again strong. And importantly, the team brought in over $1.6 billion in backlog and options during the quarter in high-end, technical, upmarket areas, increasing our total backlog with options to $19.3 billion. More on some of these wins in a moment, but super exciting. So Q1 was a relatively clean quarter at the group level. And so today's presentation, you'll be glad to hear, should be relatively short. as the overall business continued its momentum from 2020 and 2021 guidance remains unchanged. So on to slide seven. The market outlook in GS was dominated by the release of the President's proposed 2022 budgets. The DOD budget was aligned with what we presented at Investor Day, so no surprises there. And KBR was very well positioned opposite national security and DOD strategic priorities. A few of the areas are highlighted on the slide. Artificial intelligence and machine learning, cyber, trusted microelectronics, and directed energy. And you can see on the right-hand side wins that help prove this out. We're especially excited this quarter by the trusted microelectronics win to conduct advanced R&D, prototyping, laboratory testing, and supply chain verification on critical microchips and components. This is really important work done by top-tier scientists and PhDs to ensure major military systems and platforms operate as intended and have not been compromised. We also won new work with the U.S. Space Force Rapid Capabilities Office, or RCO, to support the development and acquisition of new space capabilities and the modernization of the military space infrastructure. Again, this is highly advanced work centered around technical R&D in critical military space domains. Shifting a little bit over to the civil side, the civil space side, the NASA budget request was also released and shows a marked increase and continued support for the return to the moon and beyond. And, of course, increased funding across a range of Fed Civ activities focused, as you would expect initially, on COVID, climate change, an area of differentiation, as you know, for KBR, and social justice. The proposed infrastructure plan was also released and was very R&D heavy, very technology driven and climate focused, lining up well with KBR's R&D capability and technology portfolio. This quarter, we saw some great wins also in the international government business, as you can see on the right-hand side of the slide, both in the UK and in Australia. And there was also good news from a budget perspective in the UK, and this follows on from Australia increasing its defence budget last year. As an aside, Rob Hawkins, whom you met in a GS in Focus Day, and his team in Australia are off to another good start, posting top organic growth rates again at over 30% year-on-year this quarter. And this is a nice example of a great team doing things that matter within a healthy budget environment. One aspect not on the slide but worth mentioning was the announcement on troop withdrawal from Afghanistan. As most of you are aware, we took a very conservative view in this area, which has proven to be prudent. So in short, no red flags coming from recent announcements, no red flags from the budget priorities. In fact, very much aligned to what we presented in investor day, so very much aligned with our expectations. The market and our strategic positioning reaffirm our ongoing momentum. Now onto slide eight, unsustainable technology. The market and key strategic themes shown on the slide continue to gather momentum. It's a hot market. The recent announcements from the Biden administration are fully aligned with these themes, as we discussed at Investor Day. Our suite of technologies remains in high demand, and I'm also pleased to announce a disruptive PDH technology, K-Pro, that was actually launched last year and has secured its first commercial scale order. This is terrific. There are details on this on the right-hand side of the slide, but to put it simply, this technology takes low-value propane and converts it into high-value propylene. And it does so in a more sustainable and more cost-effective manner than the competition. It is worth noting that the book to build of heritage technology was 1.5 in the quarter. led by important sales of exciting new disruptive technologies, K-PRO, K-COT, and K-SAT. Bookings of these technologies dominated the tech book to build as clients looked to meet growing demand for properly and high-value clean refining solutions with a disruptive, differentiated, and in our view, often superior technologies. Now, we've talked a lot about KSAT technology in the past, and obviously I've just covered KPro, but I'd be remiss if I did not touch on KCOT and the KCOT win in the quarter, which was a substantial booking by the team. Now, KCOT is KBR's catalytic olefins technology. It is the only, and I'll repeat, only technology of its kind in the market. Now, this technology is unique in that it produces meaningfully higher volumes of propylene versus competing technologies. And as you know, propylene is in very, very high demand. Additionally, KCOT is the only commercially proven continuous operating process on the market, which means that both CAPEX and OPEX costs are substantially lower today. and the energy consumption and thus environmental impact are also greatly reduced. So in other words, it's highly monetizable at lower investment and operating costs, translating to a higher ROI for our clients and at the same time advancing their sustainability agenda. Altogether, very compelling. So staying on the right-hand side of the slide, As you would expect, the cadence of awards in our energy transition advisory business also increased and is a great early indicator of activity in that market. There is clearly a step change in this activity and the cadence of new opportunities and awards has actually been above our expectation. Technology-led industrial solutions also had a fantastic start to the year and the pipeline for our digital solutions that leverages our IP and our domain expertise and helps our customers reduce cost, enhance throughput, increasing efficiency while also advancing their own sustainability goals is resonating. As Mark will show you in a moment, sustainable technology has come out the gate strong in Q1 And we remain confident in delivering a 21 guide that they will be a business that do circa a billion in revenue, likely a bit more, and with EBITDA margins in the mid-teens. It's a high-end government business with a sustainable tech kicker. So on to slide nine and the pipeline. In Q1, we had some really nice wins in strategic areas, as we just touched on. So really following through on winning the right work. The stats on the right you will be familiar with. You know, the stellar recompete win rate, the balanced portfolio of opportunities over a billion dollars, and multiple sizable opportunities over $100 million, showing both the overall scale of opportunity but also minimal concentration risk. The team has done a nice job across the customer set, booking over $1.6 billion in awards and options in the quarter, a pleasing result in a typically light bookings quarter. The key message here is that with recent budget announcements, we expect to see our pipeline remain robust, and the momentum we have is expected to continue. Now, I remind you, we have a low recompete year in 2021 and in 2022, and you can probably see why we're so bullish on the outlook. Now, when we announced guidance in late February, we stated that we had already secured over 70% of the work required to deliver the 2021 plan. In Q1, we had excellent execution, especially in sustainable technology. And this combined with Q1 bookings has driven the level of secured revenue closer to 80%. So in short, the markets and budgets remain very favorable. We continue to deliver well. And on that, I'd just like to give a big shout out to our people who do an incredible job and do things that really matter. We are winning work in the differentiated areas we set out to do. Our ESG commitment and direct link to shareholder value is super exciting and compelling. And Q1 was a great start to what is shaping up to be a great 2021 and beyond. And now I'll hand over to Mark, who will give you some more color on the segments. Mark.
spk03: Awesome, Stuart. Thank you. I will pick up on slide 11. So as you just heard, Q1 performance was generally in line with our 21 guidance expectations and also our long-range targets that we presented to you last month in our investor day. Revenues of $1.5 billion and $135 million of adjusted EBITDA are right in line with our fiscal 21 guide of $6 billion top line and 9% EBITDA margin. Cash was, once again, very strong out of the gate with free cash flow conversion coming in at 109% for the quarter. As Stuart also said, what's particularly encouraging is the quality of the work that's coming in in new orders. We are winning high technology content defense research and development and modernization contracts in line with our upmarket strategy. Trusted microelectronics, rapid research and development and prototyping, and others that Stuart cited earlier and also in our release are really good examples. These programs are high priority, high barrier to entry, and in some cases, leverageable to greater opportunities in the future. The same is true in sustainable tech, a stellar quarter in bookings for proprietary process technologies, including strong bookings across our new, disruptive, sustainability-focused technologies, like you heard from Stuart, KCOT, KPRO, and KSAT, and measured progress on energy transition advisory and smart operations and maintenance awards. As I'll cover later, we did have some acceleration of profit in the first quarter, which will modestly reweight our first half to second half earnings more toward the 45%, 55% mix versus our initial guide of 40-60. But the bottom line here is we are on track on all measures and thus reaffirming our guidance for the year. On to slide 12. First, as planned, we have collapsed into two segments, government solutions, GS, and Sustainable Technology Solutions, STS. Highlights on the GS side include 19% top-line growth, 5% of which was organic. We absorbed a headwind from reduced Middle East activity compared to last year, with new growth areas predominantly in sustaining, enduring programs. We have underscored the reduced dependency on the Middle East contingency work And the 15% growth in readiness and sustainment highlights the enormous success of our team in driving growth from new, more recurring sources that will carry forward. Fifteen percent net organic growth in light of the reduced Middle East activity is one of the top success stories this quarter, and hats off to Ella Studer and her team for delivering Not only excellent service in the Middle East for all the transitions going on and through a global pandemic, but also at the same time amazingly capturing and realizing tremendous growth in baseline recurring programs elsewhere in the world. Truly remarkable. Growth came from sustaining O&M funded areas, such as the important work our team does to plan, schedule, and support training rotations at the National Training Center. The rest of GS pretty much netted out, although I will mention, and as Stuart alluded to, the Australia government business continues to produce really strong growth, up to about 30% organic year over year, offsetting some of the effect of winding down Aspire Capital Works in the U.K., We were pleased with the really nice new award that the team won in the UK. Stuart also mentioned that earlier, and that'll start contributing to earnings later this year. I'll also point out the nice balance of top-line contribution across all four business areas within GS, which is consistent with our strategic intentions of having low concentration risk, access to multiple funding channels, and access to faster streams of funding growth as national priorities change. GS margins were a percentage point off of our long-term guide, and this was primarily driven by timing items and provisions that we took for a legal matter. We do expect to achieve 10% EBITDA margins for the full year, with strong contributions in the back half of the year driving that home. Now for STS, we're off to a great start in Q1 and are on track to meet the full year guide of a billion plus of revenue at mid-teen margins. As planned, margins are vastly improved over last year, mostly from the fundamental improvement in business mix toward higher margin offerings and also the cost reductions we made last year in the overhead structure of that area. As Stuart mentioned, profit was amplified in the first quarter by several percentage points on the favorable delivery of a sustainable technology project, as well as an R&D investment recovery. These results were originally planned over several quarters this year, but due to good execution, early closeout, and also accelerated cash collection of those items, we recognized all of it in Q1, which is certainly a great result from the team. Overall, while we'll likely have some margin variability this year due to timing and mix, we're confident, as I said earlier, our full-year guide of revenue and the billion-plus zip code and margins in the mid-teens will be attained. Now on to slide 13. Just a brief update here. There's no real change to our capital structure and deployment strategy, which we fully covered in the Investor Day just a few weeks ago. Net leverage edged down just one tick, driven from growth in EBITDA to 2.3. And in case you missed it, we bumped up our dividend for the second year in a row, and now at 11 cents per quarter, up 10% from the 2020 dividend level. And finishing up on slide 14, as stated, we are reaffirming guidance on all measures for the full year 2021. The guide reflects a repositioned revenue profile in both our government and sustainable tech businesses. On the government side, the guide reflects essentially an immaterial amount of Middle East contingency operations contribution replaced by upmarket advanced technology work and defense modernization, military and civil space, cybersecurity, and a surge in growth from sustaining readiness and sustainment programs. On the STS side, the guide reflects lower overall revenues but much higher barrier work areas with stronger margin attributes, particularly fueled by our proprietary sustainable process technologies. These technologies are indeed benefiting from much more commitment to greater energy efficiency and improved environmental outcomes across our entire contract base. This is now complemented with an attractive front-end advisory offering, which is gaining traction, and a recurring smart operations and maintenance offering, which leverages the large installed base of industrial and government customers we have worldwide. Altogether, the changes have produced a higher margin, strong cash flow business with well-established and reliable solutions in attractive end markets. With that, I'll turn it back to Stuart.
spk02: Thanks, Mark. Great job. And on to our final slide, slide 15. People continue to deliver. They really do. And execution was, again, exemplary. And we started 2021 well, a super strong performance across the entire business. Cash conversion, really important, was again terrific. And our balance sheet and liquidity position, as Mark demonstrated, are both healthy. With circa 80%, 80% of the work secured to deliver our 21 guide, and with a strong Q1 now behind us, We are very confident of delivering 2021, and we reaffirm that guidance today. Now, remember, that guidance reflects a 20% plus increase in adjusted EPS from a very, very resilient 20 actual. As we reiterated at Investor Day, we continually endeavour to do that simple thing, doing what we said we would do. Well, thank you for listening, and I'll now hand it back to the operator who will open the call-up for questions.
spk05: Thank you. So if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will now take our first question from Gautam at Cohen & Company. Please go ahead.
spk04: yeah hi this is uh this is dan on for gotham um good morning and uh okay so so our question was did you have you seen any you know exciting opportunities or threats um just in the initial budget proposal that they came through well i mean speaking in terms of like agencies oh obviously there's nothing i think we
spk02: Yeah, we tried to cover that off in the presentation somewhat and in Investor Day. So no real surprises, no red flags, and in fact, quite the opposite. I think we were very pleased with the levels of budget, and I think the priorities didn't throw up anything that disrupted our strategic advancement. You know, that's why we're very bullish about our future. And so I think in short, no, no real surprises at all. I think the outside of the DOD, obviously the growing momentum and, you know, particularly around sustainability as well. And of course, last night's presidential address as well. putting more money to work in the economy is just good news. And I think we are very well positioned to take advantage of that across the spectrum of what we do, which again is why we're so bullish. So no red flags, only more encouragement, I would say, is a short way to describe your question.
spk03: And Dan, I'll just add into that to Stuart's remarks. You know, if you go back to the post-election moments in time, there certainly was some concern about whether or not the new administration would continue to support NASA that had, you know, some nice increases during the Trump administration. And we're really pleased to see a further bump up of 6.5% in the request for NASA across the board and, you know, ongoing support for human spaceflight missions to the moon and, you know, longer term beyond. So that part was particularly strong in addition to Stuart's remarks as well.
spk04: Great. That's really helpful. Thank you. And then just quickly, it kind of seems like multiples in the government IT space have really compressed, whereas KVR has had a nice run recently. And I'm wondering, how does that inform – kind of the balance between M&A versus repo and whether you guys have seen kind of the M&A pipeline become more active as a result of that or more affordable?
spk02: Yeah, I mean, obviously, if your share price goes up, then, you know, if you're using that as currency, things become more affordable. But I think there's good recognition in the marketplace that KBR has changed significantly over time. And I think we're getting recognition for what it is we actually do today. We don't think we're, you know, I think our targets that we're reaffirming and, you know, obviously drive, you know, greater share price accumulation through time or EPS performance. And hopefully that reflects in share price accumulation over time as as we laid out an investor day. In terms of the way that we think about the business, we do think we are now today a very high-end government business, but we do have this unique technology, sustainable technology kicker that is arguably should be valued at higher multiples than government. So I think there's certainly excitement around that marketplace, as you're well aware. And I think that came across hopefully strongly in Investoday and has really supported the run-up that we've had recently. And in terms of the M&A market, certainly there is still obviously lots of activity out there. Consolidation will continue, but we've been very clear about our priorities in terms of how we'll look across our capital spectrum, and I think Mark laid those out. So I don't think there's any change there at all. And just to reiterate, you know, we'll fund organic growth, and we've got, you know, really strong growth, as you heard, you know, 20% plus in EPS level built into our guide, and that's the best use of cash. We've got our increasing dividend, and then, of course, if we can find a creative M&A that fits our strategic goals, uh future and accelerates us into new areas and you know we won't acquire just the bulk up we're not after market share per se and things that we already do we think we can do that organically uh so it would be and it would have to be a cultural fit and it would have to be a creative and so you have to get all these things right and and if that doesn't occur then obviously we'll be looking at uh we've got excess cash obviously our leveraged targets uh you know, as we did at the end of last year, you know, we'll look at, you know, buying back our own stock, no doubt about it.
spk04: Thanks a lot, Chris. Thank you, Dan.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 1. So we'll now take our next question from Michael at Vertical Research. Please go ahead.
spk07: Good morning, Alison, gentlemen. Good morning, Michael. Two questions. First, maybe for Mark, certainly you're talking about with these new businesses and upmarket in margins. Could you maybe reflect on, say, what the overall backlog margin, say, in GS and maybe what this new STS was six, nine months ago, where it is today? And is it going to continue to move at a steady pace so as you execute, those margins will flow timely for markets? for meeting your targets over the next couple of years. It seems that you're getting that high-end bookings at a lot greater pace than we've seen in the recent quarters.
spk03: Thanks, Mike. Yeah, we're really pleased with the quality of work as we've repeated over and over again. In some cases, that's rewarded in strong margins, and in cases such as NASA, as I think everybody knows to a lesser degree, given the nature of economics in that agency and what others face with us. And we do so proudly, and it's all good. And so we see balance in the bookings that are, yes, upmarket, but across a different mix of agencies, both in the U.S. and internationally. As you know, the international piece is favorable to margins. Parts of the domestic are favorable to margins like Centauri and the trusted microelectronics and the rapid prototyping. And, uh, you know, the continued great work we do at NASA tends to go the other direction. And I would tell you that, that the bookings we've recently had in the pipeline, we have suggest a static sort of scenario in the margin, you know, 10%, hopefully a little bit more territory. And if that weighting changes, we'll, of course, let you know. But right now, all signs indicate, you know, to a stability set of circumstances on the margin front for government.
spk07: I appreciate that. And my follow-up is for Stuart. So we've been getting from clients, and certainly Pat, since your investor day, the opportunities and certainly excitement on ammonia and hydrogen, certainly, and the opportunity there. Given what you reported here in some of the refining and chemical processes that have been working well with these new technologies over the last, say, 12 months at the Institute and getting some traction, can you be sure, is ammonia in that same realm? Do you think that's a 12-, 18-, 24-month story, or are we going to see some activity much quicker? I would think your clients are certainly asking you a whole bunch of questions on how this could work through, especially with your leadership in that space.
spk02: Yeah, good question. On Mark's answer on margins, I think what we're seeing, of course, on what was Heritage Tech, which I think everyone knows is a very high margin component of STS, and the cadence of bookings with another bid to build at 1.5 in this quarter versus Q4 and Q3 and Q2 were all well above 1. I think that's going to help drive margins further. you know, upwards as we look at the mix in STS as we go forward. So I just wanted to put that out there because that is exciting. And if we can keep that level of activity and that cadence going, then clearly that puts up a pressure on margins, which obviously is good for everyone. In terms of the discussion on ammonia and hydrogen, yes, of course, it's hugely positive. And, you know, I think Mark and myself, we mentioned the cadence and the advisory business talking about energy transition and, you know, greener technologies, which includes hydrogen, of course, as part of that solution. So very much the tip of the spear. There are lots of awards and studies ongoing, and we expect that, I mean, not all of them will prove out to be bigger opportunities, but lots will. And I think that really puts a lot of pressure credibility on where the market is heading. And in terms of ammonia demand, we expect that to be continually increasing over time. uh we've got a lot of activity and a lot of bids in the pipeline for that i think we'll start to see some of them come through in the second half of the of the year uh and and the cadence of that will continue and the reason for that is i think that i think people it takes you know two three years to build these large ammonia facilities and i think you can see the hydrogen demand with ammonia being of course the fuel the transportation fuel for hydrogen and that demand growing and people will try and get ahead of that and certainly the discussions with the bigger money producers have already started and if you've been involved in any of their sort of investor days or dialogue I mean that's very very clear so I think it all stacks up and really favourably for KBR I think the The drive for refining to be greener and, you know, our suite of green technologies we can apply to the families to help them. The product mix options we can give on terms of driving value for ecochemical producers around things using K-Cot and actually delivering, you know, more propylene than traditional ethylene propylene mixes. Again, highly attractive. And so I think you're seeing a little bit of a perfect storm across our portfolio and We're at pains not to just talk about ammonia and hydrogen in this call because that takes a lot of activity there and people get roped up in that, and rightfully so, but I wanted just to make sure that we got the message across on this call that we've got a suite of technologies, over 70 technologies that... that are being deployed actively across the green refining area, the petrochemical piece, and, of course, in the syngas ammonia piece for a hydrogen future. So I think more to come on that, Mike, and I'm sure as we get into Q2, Q3, Q4 of this year, you'll start to talk more about awards in that arena.
spk07: Duly noted, Stuart.
spk05: Thank you so much. Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing Start to. We'll now take our next question from Toby at Truist Securities. Please go ahead.
spk06: Thank you. With respect to the pipeline and kind of bid activity in tech, is that top of the funnel kind of increasing as one might expect with some of these headlines and momentum? And what's the outlook for contract size, given some of the developments that you've talked about so far on the call?
spk02: Yeah, I don't think it's too much in terms of change in size per se. You know, the size of awards from a technology perspective, you know, they haven't really changed too much over time. I think the important piece is they come with, you know, very strong cash conversion dynamics and attributes, and you've got the the the sort of high margin profile as we've discussed in the past so not really big big size uh changes there but but the the opportunity set as i've just said with really being in this sort of perfect storm at the moment is of course growing so the the pipeline of opportunity is uh it's sizable and and uh and you know we're seeing that across across all the all the areas in sts And so it's not just in one area. And hopefully that came across in the presentation today. So we're feeling really positive about that business. And that's why we're very confident in our statements about what achieving, you know, a billion plus in revenue in the team margins this year. And as Mark stated, you know, the longer term. Longer term targets are also looking good. And if you remember the detail on STS, that has a growing margin profile as well as growing revenue. So it's a double whammy, as they say. So that's all looking very positive, and the pipeline of opportunity would support that.
spk06: Thank you. My follow-up question has to do with sort of the exposure you have to op tempo via log cap. What is the outlook for that to rebound to levels of a couple years ago? I understand we've got some news on it for Afghanistan, but to some degree, Al-Temple may be tied to the pandemic and COVID cases. Could you speak to that over sort of more of a medium term? Thank you.
spk02: Yeah, it's a tricky question to answer, Toby. I think we'd all be guessing. I think the important takeaway from what we're doing in a readiness and sustainment segment where LogCap sits, of course, is that we've had 15% organic growth with actually work happening mostly in the US and a bit internationally, but not really in that Middle East OCO arena. So I think that's really the key takeaway in that segment for this quarter. And then once things become clear, obviously we'll report back. I'm very upbeat about that segment and really GS in general. And I'm particularly happy the fact that we took a very conservative and prudent approach to that arena as part of our sort of future guidance and our outlook and and really taking away any sort of volatility in our performance as a consequence. So I think we'll report back when things become clearer. There is potentially, of course, upside associated with that as things become clearer, but maybe not necessarily so. But we'd be guessing if we said anything else, and I'd rather not guess. I'd rather tell you when we know the facts.
spk06: Thank you, Stuart. That's helpful.
spk05: Thank you. So we will now take our next question from Andy at Citigroup. Please go ahead.
spk01: Hey, good morning, guys. Sorry if this question has already been asked. I joined the call a little late. But just on the defense side, the business international defense, you mentioned the decline in Q1 was primarily attributable to a project completed. How do you see that end market trending over the rest of the year and going forward? It was strong for you most of last year. So do you see that sort of resuming that strength over time?
spk02: Yeah, I mean, I think we do see that growing over time. I think the budget, we did cover the budget, Andy, and the fact that the UK has got a 16% increase in its sort of defence budget, and Australia announced moving up last year, as you're probably aware. So I think the budget environment supports our continued momentum there. We announced some good wins, and we also talked about the fact that our serial business continues to outperform quarter. So I think there's very healthy momentum, there's good budget environment and we're very well positioned to take advantage of what's in front of us. So I think that's why we're very upbeat about what we're doing internationally.
spk01: Thanks for that, Stuart. And I want to ask you about cyclical recovery in sustainable tech in the sense that you've got sizable pet chem, some refining exposure. Have you seen sort of a bounce in those end markets, seen places like China and such where KBR is historically strong? And how do you think about the cyclical recovery in that business over the next 12 months?
spk02: Yeah, well, I don't know if it's cyclical recovery. I think there's certainly an uptempo across the technology portfolio in refining and in petrochem. But I think there's a change that's happened, which really has proven to be advantageous for KBR. And you've got the refining community knowing that they have to change. And we're seeing a lot of activity, as we said, around green technology application in the refining segment. And in the petrochem segment, we're seeing this significant demand for propylene that's driving a lot of our activity around what we're doing in PDH and in KCOT as we apply these sort of technologies, particularly KCOT unique to KBR. So I don't really think it's so much a cyclical recovery. I think it's really sort of redefining the product offtakes to meet the the sustainable demands of the future and the market demands for things like propylene. I think that's what we're seeing and we don't see that in any way slowing down. It's a very hot market and will continue to be so because of the sustainability agenda that's driving the world at the moment. you know, it bears up well for a long-term run. And then when you layer in the syngas and hydrogen and money opportunities on top of that, you know, each quarter I'm sure there'll be ups and downs in various elements, but all over it, it's all over the whole sort of offering. I think you'll just see continued growth. Appreciate it, Stuart.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 1 We will now take our next question from Sean at KeyBank Capital Markets. Please go ahead.
spk08: Hi, guys. This is Alex on for Sean this morning. Thanks for taking our questions. No worries. So to start off, I just wanted to ask on the cadence of awards because a few federal contractors have highlighted some slowing in awards in the near term, which makes sense considering the change in administration. But is there a point at which we could see a catch-up dynamic there?
spk02: We've had sort of an interesting quarter of awards, I think all up at $1.6 billion with options. We've had a very strong award quarter with options, particularly in the NASA space arena. We've had a number of on-program growth awards in terms of additional monies being applied and the certain option years associated with that, just the way that NASA does it. So the overall number was terrific for KBR in the quarter and really a good news story. But typically Q1 is a slow booking squatter and particularly after an election in the government realm and I'm sure that's coming through with a number of our peers and I think we would probably, other than what I just mentioned, we would probably say that's the same across other bits of our government business. I don't really think there's a huge slowdown. I think it's seasonal. I mean, typically you get lower awards in Q1, it ramps up in Q2, it goes even higher in Q3 and then drops back down in Q4. That's the typical cadence for government. For sustainable tech, again, usually Q1 is a slower bookings quarter as people come out of year-end and they do sort of year-on-year budgets and they look to sort of pick up pace as you like as you move closer into Q2. So I really think that our bookings this quarter are highly favorable. I think it is a good news story for KBR given the typical seasonality.
spk08: Yep, that makes sense. And then on Centauri, can you provide us an update on the integration, whether there's a change in confidence behind the revenue synergy targets?
spk02: I mean, I think the integration is going really well. As we talked about, our initial focus with Centauri was to ensure that we delivered those synergies and You know, we talked about 10 cap previously, and in fact, Centauri's book to bill was 1.1 in the quarter. You know, again, sort of really, really sort of given the typical seasonal low bookings for government, again, a terrific performance, and they're performing to margin expectations. i think all up the integration is going well and the business is performing at or above expectations so hats off to the team they're doing a terrific job and i think the cultural alignment is is proving to be very very strong which is for me really important thanks everyone thank you so that is all the questions we have in the queue pronounce and i would like to turn the conference over
spk05: to you, Stuart Brady, for any additional closing remarks.
spk02: Thanks, Sian. Again, for taking the time and for your interest in KBR, as I said at the At the beginning of the presentation, you know, we're bang on. It's a very clean quarter in terms of, you know, we're hitting all our numbers and being a little bit ahead in Q1 in some metrics in terms of expectation. And obviously, sustainable tech has come out of the blocks really, really strongly. So feeling good about the future, feeling good about where we sit. And as I said, you know, saying that we're on track sounds a little bit understated in truth, given that on track means a 20% growth in EPS. So all good for 2021 as we sit here today, and obviously strong Q1 performance really helping with that. So thank you for your interest again, and no doubt we'll talk to most people on this call and calls following this one. So, yeah, stay safe, and we'll talk soon. Thank you.
spk05: This concludes today's call. Thank you for your participation. You may now disconnect.
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