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spk10: Hello everyone and a warm welcome to KBR Inc's Q2 2022 earnings conference call. My name is Melissa and I'll be your moderator. If you would like to ask a question following today's presentation, you can do so by pressing star followed by one on your telephone keypads. I now have the pleasure of handing over to our host, Alison Vasquez, Vice President of Investor Relations to begin. Alison, over to you.
spk00: Thank you, Melissa. Good day from the UK and welcome to KBR's second quarter 2022 earnings call. Joining me are Stuart Brady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on our investor section of our website at kbr.com. This discussion includes forward-looking statements reflecting KVR's views about future events and their potential impact on performance, as outlined on slide two. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K, also available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors, A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our presentation. I will now turn the call over to Stuart.
spk04: Thanks, Alison, and thank you all for joining us today. I will start on slide five. As you know, we always kick off with a zero harm ESG focus, and today I want to spend a moment on our expanding partnership with MURA. placing KBR at the center of enabling a global circular plastics economy. So really exciting. In June, we committed to invest an additional $100 million in MURA technology, which allows us to participate more fully in this sustainably focused high-growth advanced recycling sector with a global pioneer of advanced plastics recycling. MURA's mission is to enable a plastic-neutral future by providing an end-to-end solution to convert a wide range of mixed plastic waste, much of which would be destined for landfill today, back into high-quality chemical feedstocks. Targeting a million tons of annual capacity in operation or development by 2025, Mura licenses its technology through KBR to a global client base and is also developing its own pipeline of global operations. Our investment builds on the alliance we entered into last year to be Mura's exclusive technology licensing partner. Now, we have a very collaborative relationship. This is actually a really, really great team. And I've already produced numerous advances in the process technology, such as loop power, water recycling, modularization, as you'd expect, and digital operating solutions. And together, we have already licensed approximately 170,000 tons of capacity to some of the world's largest chemicals companies. So, great momentum. Now, under an expanded partnership agreement, KBR will also be the preferred services provider for Moore-led projects to support project management, engineering, integration, etc. So, really adding values, bringing key skill sets from KBR. Now, just last week, MURA made a big announcement with Dow to develop multiple world-scale advanced recycling facilities in the US and in Europe, collectively adding up to 600,000 tons of capacity. Dow will play an important role as a key off-taker of the circular feed that MURA produces. Now, this announcement is a huge endorsement of the technology and actually represents Dow's largest commitment to date to advance at scale recycling capabilities. This is just the beginning of what KBR and MURA can accomplish together. So we're very excited by this development. Now onto slide six and some key takeaways from the quarter. Now, before I get started, remember in Q1, we started pretty hot, we outperformed and we raised the guidance. Now, this was another excellent quarter for KBR, both from a delivery perspective and a future earnings potential perspective. The business is firing on all cylinders. Now, that's why we raised guidance last quarter and, again, why we continue to outperform this quarter. Our people delivered top to bottom with almost 20% adjusted EBITDA growth year on year. Now, in any market, At any time, this is exceptional. And even better, adjusted EPS growth of over 30%. And of course, and really importantly, cash generation and conversion was a highlight and was again bang on. Now, there were puts and takes, as you would expect, through the quarter, and Mark will give you some details on these, but an outstanding result all around. As expected, bookings in Q2 were absolutely terrific across both GS and STS, culminating in a group book-to-bill of 2.1x, a great performance. Now, I'll cover some of the key awards in a moment, but at a very high level, we continue to win the right work with the associated earnings profile to support our long-term targets and, importantly, our margin expansion expectations. A growing book of business underpins these targets, and we have built upon this position again this quarter. As you'll see later, margin performance was at or above expectation across all areas of business, a really terrific effort by the team. Now, this was helped a little bit by some early contract resolutions and asset sales that Mark will discuss in some detail, But even without these, margins were excellent. Also, in the quarter, we continued to reshape the portfolio. We divested a couple of non-core investments and then took that cash and invested in the circular economy in a meaningful way via Mura and added key digital transformation skills and customers with the Veeam acquisition in the UK, which we will touch on shortly. Now onto slide seven. The outlook for government solutions has been, remains, and is arguably increasingly positive for KBR. To touch on briefly the proposed full year 2023 defense budgets, early days, but the President's proposed budget represents a 6% increase over 22 levels, and the House and Senate have each approved incremental increases of $37 billion and $45 billion, respectfully. Now, it's too soon to tell where this will all land, but I think all signs point north. Now, while the budget process remains in its fairly early stages, we're encouraged by sizable increases in areas where KBR is at scale across defense modernization, RDT&E, space, of course, Intel, cyber, and of course, log cap given the continued activities in Europe. The cadence of awards in the US and internationally accelerated through Q2, and I think this is reflected in our overall book to bill, but we expect that pace to continue and to continue to be elevated through September towards the end of the US government's fiscal year, as you're aware. Now, you'll have seen increased commitments from the US but importantly also from NATO in relation to supporting Ukraine across a wide range of activities. KBR not only supports the US and Europe, but has historically supported both UK and NATO, and we're starting to see the beginnings of task orders in this area. It's still early, and it's too early to tell where this will go, but clearly we are positioned to serve near and longer term missions. As highlighted on the slide, the strong bookings performance means GS now has almost 95% of the work it requires to deliver its 2022 numbers and, of course, a very overall healthy backlog. Now, we've highlighted some contract wins this quarter on the right to showcase RDT&E, DevSecOps, and other high-end capabilities. Awards across our defense and Intel business really, really picked up pace via contract vehicles like IACMAC that we've talked about previously this quarter. And our strategy to expand services to new clients and increase contract ceilings is playing out across the portfolio. A really, really great result by this astute capture team. As you know, we've already talked about this a little bit before, we won our largest re-compete of the year, which was for NASA. This is the Ground Systems and Mission Operations contract at Goddard. And this was announced separately at the end of Q1, but went into bookings this quarter. Now, this is a five-year contract worth up to $640 million. Now, I'd like to spend a moment on the NextGen X-EVA spacesuit program for human missions to Mars. Quite cool. This is a 10-year, $3.5 billion IDIQ contract, won by KBR as part of the Axiom space team, and is a great example of large commercial-like contracting mechanisms coming out of NASA today. And KBR's ability to contribute in the increasing convergence of government and commercial collaborations in the space domain. really, really playing on our strengths. Now, this program will leverage innovative commercial applications for data and technologies and in time transition into something that looks like a spacesuit as a service model with NASA as a key customer. Now, this new approach to spacewalk services encourages an emerging commercial market for a range of customers and also grants NASA the right to use the same technologies on future exploration program procurement, so quite ingenious. Today, we provide maintenance and support to NASA for its ongoing operational spacesuit program. We will continue to perform that work, so over the next several years, wins under the new spacesuit program will be incremental. The first task orders to be completed include development of the first demonstration outside the space station in low Earth orbit and for the Artemis lunar landing. So really, really exciting stuff. Now on to slide eight. We wanted to spend a bit of time showcasing our expanding GS international footprint. Now, as I've said before, we believe this part of our business is typically underappreciated, but we do think it's a clear differentiator. So we wanted to give it a bit of airtime today. I mean, some key data points we now have a really diverse workforce of circa 5,000 people across 35 different locations with annual revenues of over a billion dollars. This is a very, very high-end workforce that has been built both organically and acquisitively, kind of similar to a US transformation. The timeline on the slide shows the quality of assets and people that have come into KBR over this period. Our capabilities in this portfolio include strategic advisory, high-end consulting, digital transformation, systems engineering, security and resilience, data science, renewable energy, and much more. The business has very, very healthy CAGRs at 10%, as shown here, and very, very attractive EBITDA margins in the teens, and it's been performing at that level for quite a time. Now, to reflect the differentiation and the importance of GS International, we've actually strengthened our executive team by bringing on Paul Kan. Now, Paul recently joined our executive ranks and reports to me as we look to further grow and strengthen this part of the business. Paul has a great depth of leadership and executive credentials, previously worked for Thales, he was the CEO of Airbus UK, and your senior executive at Cobham. So I'm very excited to welcome Paul to the team and I think it reinforces our commitment to GS International. Now more to come on this with obviously the addition of Veeam and increased alignment between the UK, the US and Australia. And I think AUKUS would be a good example of that. And that's a program we're already engaged on via Fraser Nash. So good things coming there. So onto slide nine. Now, with the COVID restrictions lifted in many, many countries, I recently went to the Middle East and got back recently. And obviously, I've been visiting other customers, a long-term IOC and sort of top chemical customers. And I'm absolutely enthused about the STS market outlook more than ever. And our delivery performance there and thus our reputation has been really, really strong. Now, at the forefront of our clients' thinking are things like, and this will not be a surprise, energy security, obviously heightened by the Russia-Ukraine war, gas and ammonia as a transition fuel, particularly for energy, a lot of investment, and I'll talk about future investment in hydrogen, both blue and green, and of course, opportunities in the secular economy. Now, all of these priorities are a backdrop backdrop to the long-term supply-demand imbalance driving investment decisions right now. The demand for our high-end services, our decarbonization capability, and our technology portfolio are continually increasing and have been in truth for some time. Now, you may recall our book-to-bill in Q1 was strong. It was actually even stronger this quarter. STS now has circa 85% of its work under contract for 2022. and a very, very healthy overall backlog indeed. There are some key awards highlighted in the right-hand side. Awards in green ammonia and contracts like the Chardonnays project demonstrate continued momentum in sustainability, energy transition, and importantly, decarbonization of existing assets. We've talked about that for some time. Venture Global, announced FID on their Plaquemines project. Essentially, this is a copy of the Calcasieu PASS project, which is now producing LNG. And our role here is engineering, project management, integration, and commissioning support over the next three or four years. Now, this program is fully aligned with our stated risk profile, so no change there. We have a partner, a really good partner called Zachary, who is the majority partner in our joint venture. and they have construction responsibility. And the client itself is furnishing many pieces of the key equipment, including the liquefaction modules and a number of other packages. Now, as a minority partner in this jump venture, our profit will come through equity and earnings. Now onto slide 10 and some thoughts on STS and an important KBR margin accelerator. STS really, really is all about earnings growth and margin expansion. And I think with VG coming into the mix with a sizable equity and earnings story, that storyline is even more prominent going forward. You will recall that we restructured this business in 2020 during COVID, exiting all lump sum EPC projects and commoditized services, and we did just that. In 2021, it seems like a short time ago, yes, just in 21, we redoubled our strategy around sustainability as the business's foundation, formally reorganizing into sustainable technology solutions and set a very bold course to double this business's EBITDA to 300 million plus by 2025. Now, understandably, This was initially met with some degree of skepticism from investors, but I think you can all see that this team is absolutely delivered. Now, STS is on course to generate circa $200 million of EBITDA this year, and that represents almost 30%, 30% of KBR's annual profit. So it's a real, real sort of solid piece of our story. And it posted book-to-bill of 1.8x over the last 12 months. It is on track, it's actually in truth ahead of pace to deliver upper teens and into low 20s margins. And it continues to operate importantly with negative working capital. Now with strong end markets that are actually getting stronger, this business is set up to deliver where it counts most, earnings growth and cash. And I couldn't be more pleased with the evolution of this business and its accelerating earnings and margin profile. So really, really exciting times ahead for SDS. And now I will hand over to Mark. Mark.
spk07: Great. Thank you, Stuart. I'll pick up on slide 12 for highlights of the consolidated results for the quarter, and then I'll hit the segments after that. As Stuart said, the team really delivered a successful Q2 on all fronts, including playing an important role in critical areas like national security, space, energy security, and energy transition types of solutions all around the world. These roles do enable our clients to advance their impact on these fronts, but those in turn motivate our employees in the fact they do things that really matter in the world scheme in our team of teams culture. In Q2, consolidated revenues were up 5% to just over $1.6 billion. Adjusted EBITDA came in at $186 million, up by a healthy 19% over last year. This reflected excellent core margins in both businesses. We also had some goodies flowing through the P&L this quarter, which was also the case actually in Q2 of last year, so I'll cover more of that in a moment. Adjusted earnings per share was up 31% over last year, building on the EBITDA growth plus favorable year-over-year taxes foreign exchange, and contained interest expense. Hedging actions benefited FX and interest results, and hats off to our treasurer, Natasha, on that one. On the tax side, we had a discrete tax charge last year that did not recur this year. Taxes this year in Q2 were normative at about 25%. As Stuart mentioned up front, we announced the $100 million investment commitment to MURA, which would increase our aggregate ownership percentage to roughly 18%. We funded $60 million of this commitment in June of this year. As a result, in Q2, we stepped up our original 5% investment made back in 2021 to its current fair market value with a $16 million unrealized gain. Consistent with past practice, we have adjusted this non-cash gain out of our adjusted EPS but it is indeed an excellent reflection of the quality and value that we and other strategic blue chip investors have ascribed to MIRA. Operating and free cash flow numbers in the quarter were really good and up from last year, 125 million and 112 million respectively. First half op cash flow of over 200 million puts us well on pace for the full year guide. Deployable free cash, which is free cash flow plus the proceeds from the ICDIS subcontractor settlement and the sale of a couple of non-core assets, was terrific at $344 million in Q2, which obviously boosts our capital deployment optionality. On to slide 13 and more on our two operating segments. Government growth was 7% in the quarter. The driver here was readiness and sustainment. with good on-contract growth and increased activity with the European command. The Allied response to the conflict in that area suggests this may be a busy area for us for quite some time, but it is difficult to predict. Even with some tough FX headwinds, international performed well on both the top and bottom line, with our Australia business continuing to post group-leading organic growth and Fraser Nash performing nicely as well. Defense and Intel and science and space were flattish on the top line with timing delays this year and elevated material buys in 2021, but came through this quarter with higher margins and profit dollars on better mix and execution. And in fact, all four areas within the government business improved profit dollar contribution year over year, marvelous. As Stuart mentioned, we monetized certain investments in the government business in the quarter for $40 million in cash and recognized a $22 million gain on asset sales, boosting reported EBITDA margins by about 165 basis points. Importantly, excluding these asset gains, the margins in GS were right in line with our targets at 10%. Now on to STS. This business, as Stuart said, is very busy right now and growing in higher margin areas as our strategy set out to do. The pivot away from Russia and timing of projects has us a little behind the planned top line number, but we still produce sequential growth of almost 20%. As Stuart highlighted, STS profit delivery was outstanding in Q2, and the outlook for the second half is also excellent. Our solutions in energy transition are benefiting from efforts to move toward a greener future and are further fueled by strong energy prices, energy security investments, and the supply constraints we're seeing stemming from the Russia-Ukraine conflict. In addition, energy transition is now taking hold with our government customers. Hopefully you saw some of this in our press releases earlier this quarter. STS EBITDA contribution in Q2 was excellent at $55 million. with 18% margins. STS benefited this quarter from a couple of items we pulled forward to Q2, but net of these items margins still exceeded 16%. The margin expansion in the core business is directly attributable to the accelerated growth in the higher margin areas of this business. As Stuart mentioned earlier, we are ahead of pace to achieve our targeted upper teens plus margin profile. On to slide 14, net leverage now stands at 1.9x, benefiting from growth in EBITDA, strong cash flows, and Q2 debt reductions, which have helped offset the effect of rising interest rates. Interest rate swaps we previously put in place under more favorable rate conditions are also really helping in this regard. This quarter, our treasury was boosted by the first tranche of recoveries from the resolution of the ICTA subcontractor matter, proceeds of roughly 190 million plus another 40 million from asset sales. Deployments in Q2 were about 200 million. We had about 60 million for the first tranche of the MURA investment. We had about 100 million in debt reduction and about 40 million in stock buybacks. We closed on the VEMA acquisition earlier today, so that'll obviously be a Q3 event and deployment. Our capital deployment priorities have not changed, but I'd like to emphasize we plan to be conservative with capital given the economic and interest rate environment. Onto guidance in slide 15. We are affirming our current guidance for fiscal 22 based on strong first half results across the board. and overall healthy market conditions. We did have particularly good mix in Q2 and accelerated a handful of closeouts and benefits this quarter that were originally expected in the second half. With 90% of our work under contract to deliver the rest of 22, we feel good about our full year guidance, of course, and we'll continue to revisit it as we progress through the rest of the year. That covers it for me. Back to Stuart.
spk04: Thanks, Mark. Nicely done. Now to summarize. I think we can all agree we've closed out the first half of 22 with a bang. Double digit growth in both adjusted EBITDA and adjusted EPS in the quarter. Bookings were absolutely excellent and we continue to win work that will support and deliver our long-term targets and, of course, margin expansion. I'm really excited about the trajectory of GS and the STS business. The market outlook across the portfolio remains robust and the associated pipeline of opportunities are attractive and aligned with a positive outlook. With the acquisition of Veeam, additional investment in Mura, debt reduction, return of capital to shareholders, we continue to deploy capital in a strategic balanced manner as we said we would do so doing what we said we would do. We have talked today a lot about EBITDA and EPS, and rightfully so. KBR is an EBITDA and EPS growth story with strong margins and excellent proven cash conversion with increasing contribution via equity and earnings and STS, the GS international growth with higher margins and hence earnings. And then when we layer on HomeSafe later this year, where we will fully consolidate but with a 72% share, overall revenue will not really tell you the whole story. Thus, going forward, we'll be talking a lot more about EBITDA and EPS and, of course, cash. With work under contract of over 90% for full year 2022, we're really looking ahead now to winning the right work for 23 and, of course, 24 to help secure our long-term targets. All in all, another fantastic quarter, building momentum on the path to 2025. Thank you for listening, and I'll now hand it back to Melissa, who will open the call for questions.
spk10: Thank you, Stuart. If you would like to ask a question, we invite you to press star followed by one on your telephone keypad. If you change your mind or feel that your question has already been answered, you can press star followed by two to withdraw your question. Please limit your questions to one question and one follow up and ensure that you are unmuted locally when preparing to ask your question. We will pause briefly to allow for questions to be registered. Our first question today comes from Jerry Revich of Goldman Sachs. Jerry, please go ahead.
spk13: Hi, this is Adam Bubis on for Jerry today. My first question is on the $1.5 billion LNG award. You know, I appreciate that KBR's role in the joint venture will provide services outside of construction and that it's modular design, but we've seen many recent LNG projects that have been over budget. So can you just help us build comfort with the risk factors that the JV is responsible for? Is it labor productivity, labor costs, and under what scenarios is the profitability of the JV at risk?
spk04: So we feel really good about the risk profile. I mean, it's a very, very good question and one we, of course, expected under this FID. I mean, this is not a lump sum project. There's no lump sum construction. It's, you know, it very much fits with our stated risk profile. The commercial model itself is the customer feels there's IP around that and the way they bring to market. But remember, as I said, there is no lump sum construction in this. The services itself do not constitute lump sum risk. And remember, the customer itself is providing the liquefaction modules, I guess the LNG tanks, the pretreatment. So a lot of that typical process risk actually sits with them and their vendors in that area. And although we're playing an integration role, you know, that typical risk that comes with your LNG type project doesn't exist for us in this construct. So it's a very unique commercial model. I think you should take comfort in our stated comments that it does not change KBR's risk profile. We're out of the lump sum EPC business. We're out of taking construction risk in that context. And of course, we're actually not responsible for the construction. So hopefully that gives you enough comfort around that risk model. It also comes through equity and earnings for us. And I would say that the numbers themselves are already on the most conservative side built into our long range targets.
spk13: That's great, and can you just update us on how you're thinking about the revenue burn cadence and government solutions from here?
spk07: Sure, Mark here. We went through the details relative to the components this quarter. We have built quite a pipeline of outstanding awards, so we are hoping to see some of that decided in our favor as we get through the rest of the year. That will have probably a minor impact this year, but hopefully a very favorable impact next year. We've got very good visibility in the business we have. It is flat to modest growth overall for the rest of the year, quarter over quarter. Of course, extracting out the effects of OEW last year. So we have seen some delays. We've seen Not a lot of decisions coming out. We're pleased with the book to bill in Q2 for sure. Gets the biggest re-compete out of the way. And so we're winning our fair share. Pace of decisions could be better, but we're actually bullish on the long-term outlook and are comfortable with our long-term targets. Great, thanks.
spk04: Just to pile on a bit there, I think we talked a little bit about this as we went through the prepared remarks. Obviously, the work coming through EUCOM we feel is very positive. And obviously, we've seen that coming through growth in that segment. And although, as Mark said, it's difficult to predict, I think the cadence of that work through the course of the rest of this year, we don't expect to change too much. And I think there's probably more opportunity given the commitment from the US and NATO as we move into next year.
spk13: Got it. Thank you. Thank you, Adam.
spk10: Thank you, Jerry. Our next question comes from Sean Eastman of KeyBank Capital Markets. Sean, over to you.
spk11: Hi, team. Thanks for taking my questions. So I just wanted to, first question is just sort of clarification. We have an intact 2022 guidance after obviously some very strong outperformance at the segment level in the second quarter. So it'd be helpful to frame how, you know, some of these pickups in the second quarter were contemplated in the full year previously, perhaps whether there's any negative offsets underneath that, like FX, for example, just to assess kind of the underlying update on the full year X, the noise.
spk04: I mean, Sean, again, a very good question. And I mean, I think the easiest way to answer this is we have an absolutely outstanding first half of the year. We raised guidance in Q1. We're conservative in nature, as you know. We just came through a very strong Q2. And Mark, who's probably more conservative than I am, actually said we'd revisit our guidance if we continue to perform like progress through the rest of the year. I think this is more a question on making sure we've got strong performance in Q3. And I think if that comes through, I think we'll certainly be looking at guidance in a positive way at that point. So, I mean, there's no guarantee of that, of course, but I think the trajectory would tell you that that's probably something we should be looking at very carefully.
spk11: Okay, interesting comment. Thanks for that, Stuart. And then coming back to the Plaquemines Award, obviously quite large, and considering it's going to flow through equity earnings, it would be helpful to get a little bit of idea on how to model that line on a go-forward in terms of quarterly run rate and Also, there's going to be no revenue here. You know, I would assume a contract of this size would have an impact on the go-forward STS margin target. Maybe it changes the arithmetic there. So any color around that would be helpful as well.
spk04: Yeah, I mean, I think our guide on our growth in EBITDA over time for STS is, you know, 20% plus and our margin expansion has room in it to go above the high teens into the low 20s. And I think both of these consider that. So I think we need to get, you know, a bit more time under our belt, Sean, to come back and answer that fully. But I think, you know, if you look to any business with underlying EPS growth that we've laid out, You know, if there was any skepticism around that, hopefully some of that skepticism disappears with the announcements today. And also the skepticism of, you know, margin expansion, et cetera. Also, hopefully some of that skepticism disappears today also. So we'll come back over time, but that's probably the best way to answer it today.
spk11: Okay, thanks. I'll turn it over there.
spk10: Thank you for your question, Sean. Our next question today comes from Brent Steelman of CA Davidson. Brent, over to you.
spk12: Hey, thank you. Maybe just one more on the LNG opportunities. Just wondering if there are sort of similar sized prospects out there of this sort of scope and steward of this sort of risk profile that you're out there pursuing and can get involved in.
spk04: Yeah, I mean, to be honest, I think they are probably few and far between in terms of the commercial model here. And, you know, I think the way that VG has done this is quite unique in the marketplace and has proven successful, of course, on Calcasieu Pass, which I think de-risks a lot of this project considerably. But that aside, I think, you know, there's a proposed phase two in Plaquemines, and we'll see if that comes to fruition in the next little while. There's certainly a lot of announcements by VG on LNG sales. And they've got a number of other prospects within their portfolio that they're trying to progress. And if we perform and things go well, then you would think we would be in for a shout with that. But outside of that today, we're not targeting getting back into the LNG EPC business in any way, shape or form on that lump sum basis. You know, we'll do some project management work. In fact, we're doing some project management work today in the Middle East around LNG development on, you know, a reimbursable basis. And, you know, we'll continue to look at those. But our rules will not, going forward, will be very different to what they were in the past. And I do think that, you know, the commercial models that make this successful are not being adopted by others. Maybe they will if they see this going really well. But I wouldn't count on it.
spk12: Okay. Appreciate that, Stuart. And then I was interested just in the focus on the international portion of the GS segment. Obviously, a lot of room to build on what you've done and as you call out relatively sort of attractive margins to the overall segment. I mean, what's your view of the long-term organic growth potential of this piece of the business and sort of ability to penetrate new programs on the international front with what you have today? Okay.
spk04: I mean, our CAGRs historically have been 10% and, you know, I think that, you know, we'd expect that trajectory to continue. And, you know, we will realize we believe some synergies across Fraser Nash and VMA as they come in and we actually integrate in a way that is united to the marketplace. And also, I think there's just a stronger connection between the US and Australia and the US and the UK and all three, in fact. I think plays well to our strong footprint in all three jurisdictions. I think you'll continue to see really, really outperforming growth in some of these markets. Of course, it's becoming an increasingly important part of our portfolio, well over a billion dollars. Our margin expectations at that level will continue to be extremely attractive. I think that's why we wanted to highlight to you it's become, you know, a really material part of our business. We tried to give you the transformation color that's taken place there that's similar to the U.S. and going up market being, you know, greater differentiation. And the returns are actually typically more attractive than the U.S. market. So it gives us a great piece of differentiation in that sort of margin enhancement story.
spk12: Very good. Thank you.
spk10: Thank you, Brent. Our next question today comes from Andy of Citigroup. Andy, please go ahead.
spk01: Hey, good morning, guys. Hi, Andy. Good morning, Andy. So it doesn't seem like you're having issues, but could you talk about how a really tight global supply chain and labor markets are impacting KBR? Have you seen any costs created impacting your margin and or have any projects been slower than expected to move forward given supply chain or labor issues?
spk04: I mean, Andy, not really. I mean, we're typically a services business, as you know. We're not really, I mean, from an inflationary point of view, we did a mid-year review across the business in terms of salaries and things. And, you know, that's all built into the numbers today. I think retention, recruitment and numbers are leveling out somewhat. And so, you know, recruitment is keeping up pace. even though a turnover was probably a bit higher than it was a year ago, but we've addressed that. We're a provider of labor typically, so we're not seeing any real impact of the supply chain piece on what we do. I think the other questions really around FX and interest rates, I think Mark addressed them. I think Treasury and Mark and the team have done a terrific job of actually mitigating those risks somewhat and the international businesses continue to outperform, which also helps, of course. So I think, you know, some perhaps others are feeling greater headwinds in those areas than ourselves. And so I think that encourages us to be, you know, very positive on this call with the output.
spk01: Got it. And then just following up, I know you said STS is on target to achieve 200 million Aviva dollars. Can you give us more color into what you're seeing in the business? It seems like cyclically, sectorally, you should have a nice tailwind, but I think you were flattish in the past, a little bit behind in that double-digit revenue growth. What are you seeing and maybe any initial views on the Inflation Reduction Act and what it could mean for KBR?
spk04: Obviously, I think answering the latter part first, that puts quite strong tailwinds into the market. In the US, we've not done the full assessment of that. Again, as we said, it all points north. And, you know, a lot of effort and effort, sort of dollars targeted at energy security and climate change, as you're well aware. So, I mean, that only plays into our key skill sets. It really does. And in terms of what we're seeing across the board, you've got NOCs and IOCs that probably modeled an oil price in their original budgets that are far, far south of where it's at today. So these are incremental dollars that are all dropped to the bottom line, really, and so we're seeing a very cash-rich client base that wants to continue to address, I guess, the energy security issue and the supply-demand imbalance, and they want to gain market share. And so investment is, you know, when I went around the Middle East, investment commitments from companies like Aramco and from Adnok, et cetera, are immense. And they really contain a strong hydrogen component, a real thought about not burning crude oil for energy and transitioning away from that and then taking crude and turning it into chemicals, et cetera. So a lot aligning with our technology portfolio, a lot of cash being put to work, a lot of market share that others will try to defend. And they're also cashed up, if you like. So I think we'll start to see increased investment across the board. And in truth, there's been underinvestment. in this sector for quite a few years now, as you're well aware. So it's that you've actually got refiners making margins that they've never made before. So really that sort of sweating that asset and making sure the technologies fit the future. And there's, I guess, optionality, again, placed our capability. And then you've got the chemicals companies similarly looking at expanding, particularly around olefin and looking at how they actually expand that marketplace with demand very, very strong. And then you layer in, of course, the whole sort of hydrogen future and the fact that the blue and green hydrogen is very much on everyone's shopping list. And of course, you can see the book to build of our technology and STS businesses as a consequence is very, very strong. So it's almost a perfect storm and not only from a demand cycle, but actually the ability to pay for projects. And we're seeing that across the board. And there's an urgency to this that we haven't seen for a number of years. And so, you know, we're seeing a lot of uptick in opportunity set across that business, which is why I was very upbeat about it in my prepared remarks and probably less conservative than my normal self around that. But, you know, it's a supermarket. And I think the award of BG as well really sort of shows that the energy security piece is real. You know, that BG have already announced sales of LNG, the first company to do so, to Germany. So, and there's probably more to come in that cycle. So, I think it certainly gives a very strong medium-term outlook. Not one year, but, you know, a number of years. Appreciate all the color.
spk10: Thank you, Andy. Our next question today comes from Jamie Cook of Credit Suisse. Jamie, please go ahead.
spk05: Hey, good morning. I guess two questions. One, Dorit, as I think about you guys today versus, I don't know, two years ago, five years ago, the business model and the portfolio is obviously a lot different, lots of concerns out there. you know, about, you know, a recession, you know, in the U.S. and Europe. But can you talk about how you think about the earnings resilience of KBR if we do go into a recession, just given some of the visibility and the backlog you have? Do you think there's still an opportunity to grow your earnings as you're thinking about the next sort of 12 to 18 months? And then my second question, Mark, I just, you know, update, obviously, the cash flow in the quarter was strong. The balance sheet's in a good position. We're doing sort of niche, you know, sort of niche acquisitions. How are you thinking about your capital allocation priorities? Any larger M&A opportunities? Thank you.
spk04: Thanks, Jamie. I mean, obviously, as we look at our strategic planning, not just this year, but every single year, we look at the resiliency of our earnings portfolio and whether that's actually political, geopolitical, or economic. And I think we've positioned the businesses very nicely in areas that will continue to be funded and will continue to be funded through really any disturbances that I mentioned earlier. I mean, if you think about energy security, that issue is not going away. If you think about the resiliency of moving the agenda from a climate change perspective and the commitments that are already being undertaken that are multi-year commitments, LNG being, you know, the VG thing being a perfect example. It's not a one year, it's a three, four year program. So I think the resiliency around that portfolio is very, very strong. And then when you turn to look at government, I mean, remember, we talk about KBR being very differentiated because of the length of tenure of a contract portfolio. And this is the time where people need to actually think about that and understand why we've done what we've done and And really the resiliency around that and the length of tenure, not for one year, but I think the average tenure is 10 years in our contracts portfolio is extremely, extremely important at providing, I think, our shareholders and our people with confidence around the resiliency of the business. And to top that off, I think we've actually positioned the business in areas that will continue. I mean, the threats of near-peer threats of Russia and China are not going away regardless of any recession or potential recession. and therefore I think continued investments in the areas I discussed in my prepared remarks will continue. So I think we're very, very well positioned to be resilient through any potential recession, and I think we've done that very purposely, and I think we've been very thoughtful around that and tried to articulate that on a number of occasions to the market, and hopefully that now resonates. And Mark, the second question.
spk07: yeah Jamie a good good morning to you look, we have a great balance sheet today we've worked very hard to achieve that and we want to keep it that way. And we are in a situation where we're not sure where the interest rates are going and the magnitude of that and we don't want to be overly speculative either. So I did say earlier that we tend to be cautious and deploying capital, we intend to continue to be balanced. We obviously just did VEMA this morning. That was done at an attractive valuation. I think we would continue to be constructive for modest size acquisitions at attractive valuations, but we also have a view there might be better pricing later in the event of a recession, and we'd like to have some dry powder available for that. So with respect to that, we'll be more cautious than usual on the M&A front.
spk04: Yeah, I mean, it's interesting with these bolt-ons, We call them bolt-ons, but they're actually very strategic for us. And digital transformation is obviously a key theme running through much of what we do. But the multiple we paid for that business was circa 10 times. And it's a business that's growing mid-teen keggers and with margins in the high teens and low 20s. I mean, if you put that in context of what you can achieve in the wider market today, That's a really, really attractive deal and marked right. I think the heat will come out this market a little bit. Some people who are over levered may get themselves in trouble with higher interest rates and may not be as resilient to recession. And it'd be nice to be able to pounce, if you like, when the time is right and assets are perhaps a little bit more affordable in the US and in the broader context that are more sizable, for example. So that's kind of where our thinking is today.
spk05: Appreciate the callers. Thanks a lot.
spk10: Thank you, Jamie. Our next question today comes from Toby Summer of Truist Securities. Toby, over to you.
spk14: Thank you. If we think of the space domain for the company, your exposure to NASA military intel, how does the growth there
spk04: compared today versus the overall gs segment and what's the relative growth outlook compared to the gs segment on a go forward basis yeah i mean it's a good question to be lots of lots of discussion a lot of excitement about space across obviously the the the nasa side with the increase in budget and the commitment to go to the moon and beyond uh you see the changing contractual structures coming through NASA with this greater commercialization and that sort of symbiotic relationship, if you can get it right, between government and commercial. And then you start to look at, obviously, the broader commercial space implications, and that is a growing part of our portfolio. And then, of course, the military space and the intel space side, which, of course, has got a far greater level of investment in it today than it's ever had. But what is, I guess, and that comes through, obviously, a DNI segment. And we're seeing very good pickup in awards across that business in Q2. You know, those contract vehicles like Air Max and things actually do their stuff. The bit that is slow is NASA awards. And we did pick up our Gizmo Recompete, which actually was quite quick. But we have multiple billion-dollar awards sitting in that arena. And I think as a consequence of that, our revenue profile has been fairly flat this year, year on year, in science and space. Our performance has been terrific, so the margins are up, which is exactly what we want. And so I think anything we win, having won a league of these, and anything we get between now and next year will actually increase the cadence of growth across that segment. but the timing is difficult to predict. And I think that's the key piece of this. But we are pretty confident when you roll in the whole space piece, the D&I piece, and of course what we're doing in maintenance and sustainment, and importantly, GSI, the international realm, that our overall growth targets are achievable in GS through to 2025.
spk14: Thank you. My follow-up is, are you investing to grow your bid and proposal teams in the government solutions area to prosecute what seems like an opportunity for free equity? And if so, what level of growth in those teams or investments are you delivering?
spk07: Toby, Mark here. Yeah, we are increasing it to a modest degree. It does ebb and flow with specific bids and proposals, as you had expected. to some degree, but we've built a good team. When you make acquisitions, you tend to take the best and brightest out of all of them and combine them and go after things you couldn't go after before. I think we've done that well. I still think we're in early innings on that, and as we go up the food chain and up in scale, it will require more investments, so we have that baked into our long-term plan. Organic growth is the best type of growth, obviously, and so those types of investments often pay off, and that is definitely in our sites to make sure we leverage that as much as we can. Thank you.
spk10: Thank you, Toby. Our next question comes from the line of Gautam Khanna of Cowan. Gautam, over to you.
spk09: Hi, good morning, guys. Hey, Gautam. I was wondering if you could update us on two things. you know, the timing and sort of the circumstances around the Home Safe Alliance win. And, you know, if that's still on track for an October resolution and what you can say there. And secondly, in the past, you talked about the Eurocom business seeing about 100 million of task orders related to the escalation, you know, Russia, Ukraine. I was wondering if you could update us on you know, what that might look like this year and next in terms of revenues. Thank you.
spk04: Okay, so I'll take the first one and maybe mark the second. So they, I mean, the home safe process continues to be on track. We haven't had anything that would give us any concern that this is not happening in the timetable we laid out earlier. So in October, you'll recall we do have a, a transition, a nine-month transition, and how all that bears out. Once we get awarded, we'll come back and give you an update. But so far, no change, Gotham, on that.
spk07: And Gotham, on UCOM, I believe it's your second question, and our support relative to the UK and Russia affair, well-positioned there under Log Cap 5, as you well know. There's the normal activity, and then there's the plus-up relative to supporting those activities. So far this year, it's up about roughly 100 million over its normal pace, and we expect that type of pace to continue through Q3. It's a little hard to tell after that, and we've been very cautious after that in our view. We suspect we'll be there for a long time, but it's hard to say with looking at contracts and specific guidance from the customer, so we're cautious on that front. Thank you.
spk10: Thank you, Gelsom. Our next question comes from Bert Subin of Stifel. Bert, over to you.
spk03: Great. Thank you, and good morning.
spk04: Hi, Bert.
spk03: I'm Stuart Mark. You know, a lot of what you guys have been talking about, sort of confidence on a couple of the businesses within government solutions, if I were to parse them out, and say LogCap, the international government services franchise in space, and you had to choose, which would you say is going to grow faster as you approach those 2025 targets?
spk04: That's almost an impossible question to ask. I think that the D&I business has had fantastic organic growth, as you looked at it last quarter, just from its cadence and when things are awarded. I think if Things come through NASA this year. You'll see quite nice growth coming through the space business. But as I said, it's unpredictable. The R&S log cap business, you know, Mark said, it's quite difficult to predict. And GSI continues to perform nicely, you know, without 10% CAGRs. So I think the beauty is the portfolio. And I think the confidence our shareholders and the markets should take from that is the continued performance at or above expectation. And every quarter, one of these segments does a little bit better than the other. Now, they're all performing very, very well, as Mark said, but one will outpace the other on a quarterly basis, just on time of awards, resolution of award fees, or contract closeouts, or whatever it might be. So I think at the end of the day, I think that's the piece that's more important. We've laid out what I think are very realistic growth targets and that hopefully the market is getting more and more comfortable on achieving those as we head through each quarter. So I think that's probably the best way to answer it. It's a bit like saying, you know, who's your favorite child? And you just don't do that, right? And so we're not going to. And I think that ultimately the portfolio is a strength.
spk03: Fair enough. And just a quick follow-up, thinking about the other side of the business, STS, if I look at the components of that business, you have the ammonia, syngas, you've got recycling, petrochemicals, inorganics, and some of the energy refining. And obviously you highlighted a pretty sizable deal on the energy refining side. How should we think about the other components? Clearly, we're in a position right now where fertilizer is in short supply, but you're not hearing a lot about capacity being built out. You've highlighted MIRA for the recycling side, but just in the context of the European energy crisis and a lot of things going on globally, how should we think through some of the other components that get you on those growth targets?
spk04: Yeah, it's a kind of similar answer, I think. Our portfolio is the strength. We have 70 plus technologies and I mean, I think we're seeing a huge amount of activity and hopefully we'll see some positive movement there in the ammonia side. We've announced a number of green and blue ammonia this year. There's a lot that we're bidding right now. There's a lot of traction in that area. And I think maybe you're not seeing it as much as maybe you expected, but there's certainly a huge amount of activity in that ammonia segment for us. We're seeing a huge uptake in olefins. and opportunities around olefins, as I explained in my prepared remarks. And then you've got this, the whole hydrogen piece coming through, which again is related to ammonia, the blue and green cycle of that, and the continued investment in those areas. So it seems to be, again, that every quarter, depending on the time of awards, one seems to win out over the other. So, you know, we're seeing obviously investment in traditionals, we're seeing to give companies time to develop renewables. We're seeing refiners spending cash to keep their assets and improve what I would say optionality in terms of moving away particularly from transportation fuels and looking at other options there. We've got new technologies to help them with that. So we're seeing a lot of activity, more so in North America today than we've seen for many years, which is not unexpected. but also across the rest of the world. So I think, again, it's not one segment over another or one technology over the other. I think it's a portfolio response question, and we actually feel pretty bullish about things like ammonia.
spk03: So just to clarify, you're not expecting a material negative impact on what's going on in Europe, or is that just something you're monitoring right now?
spk04: We do not expect a material impact for what's going on in Europe, other than an increase in demand because of energy security. It's a material impact, if anything, on the upside, but we've laid that out in our targets already.
spk03: Thank you, Stuart.
spk10: Thank you, Bert. Our next question comes from Mona Claus of Vertical Research. Mona, over to you.
spk08: I think that's Mike Dudas. I'll take his spot anyway. Good. I've never heard of that one before. Sure. Damn, my secret name's out. Darn it. Good afternoon, gentlemen and Allison.
spk10: Hi, Mike.
spk08: So I won't ask you to predict the winner of the U.K. Prime Minister race, but since you're over there and you've been certainly adding a lot of assets and talent to grow that part of the business out of the U.K., Can you get a sense of, you know, given the politics, given what's going on, I would assume that budgets and opportunities are very strong over there. I just want to see if you would agree.
spk04: Oh, very much so. And remember, it's not a change of party. It's just a change of leadership in the Conservative Party and their commitment to defend spending is clear. And that budget has been set unlike the... I mean, the US does this in annual cycles. The UK... does a three, four year commitment. So it's a very different regime. So we're feeling very confident about that spend. We're feeling really good about the commitments of the UK and others, in fact, to support the war effort in Ukraine. And we've got the whole dynamic, which is a little bit different in the UK around Brexit, where it has to be, the UK has to become more self-sufficient. And as a consequence of that, the activity levels going on with Fraser Nash and Vima, et cetera, are heightened. by those factors.
spk06: Thanks.
spk10: Thank you for your question, Mike. We'll now move over to our next question from Avi Jarosiewicz of UBS. Avi, over to you.
spk02: Hey, good morning, guys. On first, Steve Fisher. I guess just on those NASA awards being, are they more sluggish now than they've been in the past? And You also noted that they're rather unpredictable. I'm wondering if you could just help frame that in terms of kind of a range of timing. Like, does that mean a window measured in months, quarters, you know, possibly up to years? Any color there would be helpful.
spk04: Yeah, so I think that the problem is it is unpredictable. I mean, you've got the Gizmo contract, which we bid and was awarded in fairly short order, it was not protested, and we moved forward, which was terrific. You had the MOSI contract that we bid, we won, it was protested, we bid again, and four years later it's now under evaluation, and hopefully will be awarded later this year. And we've got some that are being in the machine, if you like, within NASA for over a year. So just waiting for a ward. And I think it probably relates to different centers, different resourcing, different priorities. It's tricky to tell, and I ask, are people the same question? And we don't really get, I mean, that's just the sort of answer that we get. I mean, I think the nice thing to take away from that is that our risk of not doing What we said we do is actually very low. We've won our largest re-compete of the year. Anything we win is additive. We've won the spacesuit program, as we discussed in my remarks. And everything that comes through between now and the end of the year is just a positive impact to the 23 story. I think the performance that we are having really helps us in terms of not just margins and returns, but also position as well for re-competes, because you don't get strong award fees unless you're doing really, really well. So I think that all plays well. And, you know, we will see things moving as time progresses over the next six months to the end of the year. And I suspect the cadence of awards will pick up a little bit as well as, you know, people get back from COVID and things like that.
spk02: Got it. Thanks for that. And maybe follow up here. How should we be thinking about the backlog in STS from here? Do you expect to be able to sustain at these levels or maybe wind it down as some of these bigger programs burn?
spk04: The nice thing about announcing a $1.5 billion win in that arena is that it enhances your book to build. The challenge is then continuing with that. But I do think that the market is supporting continued momentum in that arena. I really do. So I'm not saying that we're going to be struggling. I think the opposite. I really think that the market is hot. I think that our position in the market is really, really strong in the areas where we want to play. And we don't want to play everywhere. And I think that's key to our success also. So I think being focused, being smart around the work that we go after and why and the earnings profile and cash profile of that work will continue to be front of mind. So no, I don't think there's too many headwinds there.
spk02: Understood. Appreciate it, Tyler. Thank you.
spk10: Thank you. This concludes the Q&A portion of today's call, and I will now hand back to Stuart Brady, President and CEO, for final remarks.
spk04: Thank you. I mean, I think just a short thank you. I think some excellent questions over the last hour or so. And thank you for listening. And obviously, we'll be talking to you further over the course of the next day or so. Thank you.
spk10: Thank you. This concludes today's call. You may now disconnect your lines.
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