KBR, Inc. (KBR) Q4 2022 Earnings Report, Transcript and Summary

Hello, everyone, welcome to the KBR Inc. Fourth Quarter 2022 Earnings Conference Call. My name is Charlie and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Jamie DuBray to begin. Jamie, please go ahead.

Thank you, Charlie. Good morning, and welcome to KBR’s fourth quarter and fiscal year 2022 earnings call. Joining me are Stuart Bradie, President and Chief Executive Officer; as well as Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the year and then open the call for your questions. Today’s earnings presentation is available on the Investors 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 2. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our presentation. I will now turn the call over to Stuart.

Thank you, Jamie, and thank you for taking the time to listen this morning. I will start on Slide 4. Now you’ve seen this before. It’s our Zero Harm pillars. And today, given its year-end, I would like to focus on health, safety and security, which is the button on the top right there and really have a look at our performance in 2022, which we’re going to do on Slide 5. So when it comes to HSSE, we focus a lot on leading indicators, things like visible leadership, interventions, tonnage to care conversations, task planning and things like risk assessments. And we believe this drives the right behavior in line with our people-centric values. The proof, however, that we – what we do on the front end is really working is, of course, what comes through on the back end so the lagging indicators. Now remember, we believe good safety is good business. And often, there’s a direct link between safety performance and mission and project delivery performance. So I’m just pleased to report that in 2022, we had one-off, if not the strongest performances in our history, with a total recordable incident rate of 0.079 and we achieved 91% Zero Harm Days across all our projects, our sites, offices on a global basis. And these numbers include contractors and subcontractors under our responsibility, so quite a performance. Both of these lagging indicators are industry-leading and are a direct result of the amazing performance of our people and our partners all over the world. This takes a laser focus day in, day out, 24/7, and I will publicly like to thank everyone involved. The team truly delivered. We’ve highlighted some standout projects and programs as well as some of the external awards we have received during the course of the year from LOGCAP V to our Aspire program in the UK to amazing performance and recognition in Saudi Arabia for sustainable technology to what we do for NASA. And last but not least, the ongoing work in the European theater, high cadence, high-pressure, changing scope and requirements with exemplary safety performance. There are, of course, many, many more of these, but hopefully, this gives you a sense of the global and cross-segment nature of the 2022 performance. Now on to Slide 6. Now normally, earnings, we talk about the quarter’s result. So in brief, we closed out the year exceptionally well, overperforming across all key metrics, a really strong finish, both operationally and fiscally. I thought, however, I would concentrate more on the overall health of the business in 2022 and how this positions KBR going into 2023, including confidence in our 2025 targets. So let me start on people. The people of KBR do things that matter every single day. I want again to thank them publicly for all that they do. What we say today would be really hollow without recognizing this incredible team. That said, and as everyone is well aware, there is a real warrant talent ongoing, which really heightened through 2022. I think we managed through this pretty well. And over the year, we increased our head count by 8%, which I think sets us up nicely going into 2023, especially when you consider that we also drive shareholder value through IP, proprietary equipment and catalyst sales. As a testament to the progress we are making towards KBR being a talent magnet, and in so doing, provide an employee experience that allows each and every person the opportunity to bring their wholesales to work, the feedback from the employees themselves was that 82% of these KBR is in fact a great place to work. During the year, we advanced our R&D agenda across the Board with both gender and ethnicity improvements, and we were recognized by Forbes as the world’s top female friendly company. Over and above, we’ve been externally recognized also as a great place to work in multiple countries across the world, which I think is a true reflection of our aligned values globally. We were also recognized by the Wall Street Journal as a best managed company by Fortune Magazine as one of the world’s most admired companies and as most on a company by institutional investors, and we ranked at the top of the class amongst both mid-cap and overall sector peers. These accolades not only improve employee engagement, but also benefit retention and I think our ability to recruit, which is the key point here. Now don’t get me wrong. This is a journey that never ends. We’re certainly not perfect. And we know there is more to do, but we’re committed to a continual improvement and a people focus. On ESG, Zero Harm, I covered our safety performance earlier, so I won’t repeat that. But impressively, and of course, as you would expect, 96% of this KBR is a safe place to work. And that means that they believe that we care and that we look after our people, which is really, really important to me and the team, both physically and mentally. Being a responsible company and an ESG leader is for us, table states. But as you can see, the unique aspect of KBR is that we align our sustainability capability directly to shareholder value and increasingly so with circa 40%, 4-0% of our earnings derived from sustainable activities. And as you know, since 2019, we’ve been carbon neutral and we’re making good progress towards our operational net zero 2030 target. Now on to business growth on the bottom left. Annual book-to-bill across the company was 1.2 times on a trailing 12-month basis, and this delivered $8.2 billion of bookings and options and really allows us to maintain momentum as we head into 2023. You can see we’ve got strong backlog coverage. Importantly, an attractive pipeline that includes $10 billion submitted and awaiting award and just to level set, that’s up 10% from last year. And to be clear, HomeSafe is not included in bookings, not in backlog or in pipeline given its scale to show an apples-to-apples comparison to what we’ve previously reported. Now our key takeaway here is that we have over 70% of our work under contract to deliver on our 2023 guidance, so really strong coverage. On to financials, obviously, Mark will cover these in detail. But throughout the year, quarter-after-quarter, we proved resilience. We grew revenue in line with our targets. We improved margins with strong operational performance and a strong STS market. EBITDA dollars ex-OEW was up 18%, an amazing earnings performance. Cash performance was absolutely terrific, but importantly, there were no surprises, and we beat and raised guidance twice during 2022. KBR is a business with predictable growth attributes, technical differentiation, expanding margins, minimal concentration risk, a real differentiator and is strategically positioned in well-funded markets. Now we promised a balanced capital deployment strategy, and I believe we delivered on this by maintaining responsible leverage during periods of volatility in 2022, while returning close to $270 million to shareholders. Now we have plans to up this in 2023 and beyond that Mark will cover later. Strong operational performance in fiscal management allowed us to meet and more than overcome interest rate and FX headwinds through the year without which our IBT [ph] would have been circa $15 million higher, so again, a terrific performance by our people and our operations. Now on to Slide 7. As we head into 2023, I wanted to spend a few moments expanding on our sustainable technology business. As you’ll see in a few seconds, STS has grown above expectations especially in earnings, as we talked about previously. And this is expected to continue into 2023 and beyond. And it’s worth noting, STS now represents almost 30% of KBR’s group adjusted EBITDA today. At the top level, we sell and deploy IP and sustainable services to growing markets across energy transition, energy security, climate change and smart affordable solutions. Now the attractiveness of these markets and acceleration of our performance towards our long-term targets is worth exploring a bit further. So by the numbers, we’ll meet our 2025 STS target in 2023. The – back at our Investor Day in 2021, we said we’ll we double our EBITDA by 2025, hitting circa US$300 million. So we’re well ahead of pace. So what’s driving this? Demand for IP has increased not just for hydrogen and ammonia but for plastics recycling for olefins due to clients wanting to diversify and optimize their product streams, green refining solutions, lithium extraction for EV batteries, et cetera. The solutions desired are moving from traditional gray to blue and ultimately to green. Our pipeline is very strong across a wide portfolio of technologies. And I realize that ammonia to hydrogen is super exciting, but I want to reiterate this acceleration is multifaceted. Now on ammonia and hydrogen itself, the uptick in our pipeline for blue ammonia, so I think traditional gray with renewable energy or carbon sequestration in combination, for example, has increased significantly. And I recently visited Japan and their commitment to coal firing ammonia in their coal-fired power stations is clear, which will drive significant medium-term demand. Ammonia cracking, so converting ammonia back into hydrogen is also an exciting opportunity in its own right but it will again further drive medium-term ammonia demand, so really exciting. Also this year, I’ve traveled through the Middle East – and I mean, the publicly announced capital spending programs through to 2030 is enormous well in the trillions. And without fail, the various countries are committed to doing this with a green and decarbonization thematic in all that they do. So I think world scale blue ammonia, gas to power to stop the burning of crude, crude to chemicals to increase product optimization, renewable power, significant CO2 sequestration and not to mention things like sustainable cities, et cetera. As you’re aware, we’ve had a really strong presence in the Middle East for decades, and we’ve seen as a key partner there. And as a reference point, our revenue from STS alone in the Middle East grew 26% in 2022 alone. Now you’ve seen this, Blue Chip clients have recently announced significant returns across the globe, which, of course, facilitates increased spending for the improvement in decarbonization of existing assets as they look to shore up energy supply and their security, plus, of course, lay out their plans associated with their ESG story and energy transition, hydrogen, et cetera. The demand for our sustainable services has increased as a consequence in the level of synergy between our sustainable IP offering and our sustainable services is significant, as we’ve shown here by the intersecting circles. A good example of this would be Mura, a plastics recycling technology, where we obviously sell the Hydro-PRT IP. But in addition, we assist across the delivery spectrum for modularization, balance of plant engineering, program and control management, commissioning support, et cetera. Our view is that in the medium-term, the size of these two will continue to be very similar. So think a 50-50 split, and of course, be increasingly symbiotic. So on to Slide 8. You can see how this business has really kicked off since we restructured and launched sustainable technology solutions. They outperformed in 2021 and again in 2022. And as I said earlier, we will meet our 2025 target in 2023, two years ahead of pace with ongoing growth and earnings momentum through to 2025 and beyond. Now clearly, we’re feeling really good about the 2023 number, but of course, this allows us to firm up even more behind our 2025 adjusted EPS target. As I said earlier, STS was close to 30% of KBR’s earnings in 2022. This will be closer to 36% in 2023. We’ve always said our focus was on quality of earnings, and this is a great example. Now before we turn to the next slide, I just wanted to talk about Government Solutions for a few seconds. There has been little change in the market, so no real update here and hence no slide, but it’s important, I think to reiterate the following that are more particular to KBR. Our international business, particularly across the consulting advisory area in the UK and in Australia is looking at double-digit growth as we go forward. And GS International is now circa 20% of KBR’s earnings as we move into 2023. The OPTEMPO in Europe for our GS U.S. RNS business has not slowed in the slightest and this is set to continue again as we move into 2023. Also in the U.S., long-term RDT&E budget is relevant and accessible to KBR are up double digits. So key markets within this like Space Force are growing faster, which is being reflected in our ongoing growth. Also, this has a direct impact to the broader defense and Intel segment which grew nicely in 2022, and is expected to do so again in 2023 and beyond. National Security, as I’m sure we’ve all seen in the recent foreign objects being shut down above the U.S. and Canada. It’s ever more critical and of course, in focus. The HomeSafe transition is going very well with strong alignment with our customer and ramp up, as you are aware, is expected through 2024 and 2025. Several Space awards will catch up, we believe, in 2023. And new contracts like the spaces contracting program will continue to gather momentum as we move forward. So in short, GS is on pace, underlined with our 2025 targets. We have multiple pathways for growth across the GS U.S. landscape and internationally. And of course, the increased cooperation via Arcus between the U.S., the UK and Australia will also gather momentum through 2023 as we look to security in the Pacific. So let’s turn to Slide 9. Today, we’ve given you more detail on sustainable technology. And we’re excited we are well ahead of pace. We’ve also highlighted multiple routes to success across our GS portfolio and combined with STS, you can really see the resilience but also the excitement we feel for KBR’s future. We outperformed 2022 to overcome and actually a bit more the headwinds of inflation, increased interest expense and FX, and we’ve set ourselves to continue to do so. So no excuses. I’m less delighted to reaffirm our adjusted EPS 2025 target of $4.75. We are ever more confident of achieving this target. Now I’m sure there will be some moving parts with EBITDA directionally up, which, of course, is terrific, as you’ve seen with STS’ performance. But things like interest expense, et cetera, are also offsetting what you would expect. Now previously, we gave you the work under contract to achieve our 2025 target and using the same basis of calculation, this now sits at over 70%, 7-0% so hence our increasing confidence also. Our cash performance continues to be really strong. So absolutely no change there. We deployed more to shareholders in 2022 than ever before and Mark will cover in more detail our plans to do more. Now speaking of Mark, now would be an ideal time to hand over, and Mark will run you through the year in a bit more detail. You’ll cover, of course, capital deployment, and conclude with our 2023 guide. Mark?

Awesome. Thank you, Stuart. I’ll pick it up on Slide 11, and I’ll say it sure is a pleasure to report another year of healthy balanced financial performance and progress towards achieving our long-term targets that Stuart just covered. Revenues for 2022 were in line with expectations, coming in at $6.6 billion and as you can see, up 9% over last year on an ex-OAW basis. 6% of this 9% was organic growth. As a reminder, OAW or Operation Allies Welcome was the large episodic humanitarian support effort that generated about $1.6 billion in revenue in 2021 with a few hundred million spilling into early 2022. All business units within Government Solutions and Sustainable Tech, STS contributed to growth this year, and sure is nice to see STS turn the corner on producing top line growth as legacy work continues to trickle off and being replaced by much more profitable and sustainable endeavors, just like our plan all along. Profits were the bigger story, and we’ve been emphasizing this with investors for some time. Our strategy has been to focus on upmarket offerings in the government, and high-margin IP and integrated solutions in sustainable tech. This shift underpins the profit margin improvement plan we have been body in our long-term targets. Our results for 2022 show we are off to an excellent start indeed. Adjusted EBITDA margins grew to 10% with improvement coming from both gov and sustainable tech, together, adjusted EBITDA margins grew 166 basis points. And consequently, adjusted EBITDA dollars grew 7% in total despite the OAW headwind. And as Stuart said, 18% adjusted EBITDA dollar growth, excluding OAW, quite terrific. Adjusted EPS finished the year at $2.71, above our guidance. Finishing above reflects continued excellent project performance by both segments, a bigger R&D credit than expected and FX gains from hedging activities below the line, which actually offset some losses above the line. An important takeaway for the year is resiliency and agility. At the start of the year, the Russia-Ukraine conflict required a repivot of in-flight projects in our STS business. They did so, and they actually delivered a spectacular year. We then faced higher interest rates than unfavorable FX developments. These latter two costs, as Stuart said, about $15 million of pretax headwind, which is overcome by operations across KBR. This points to strong end markets, demand for our offerings, the KBR we deliver culture and global reach, which improves our operational flexibility. Profits for the year translated to cash in a direct way. Adjusted op cash flow of $424 million reflected a conversion ratio to adjusted net income of 110% and 92% on a free cash flow basis. We did have about $25 million of accelerated collections right at year-end. We also had higher than normal CapEx in 2022 at a little over 1% of revenues or about $70 million, and we actually expect that similar level to reoccur in 2023. These are primarily revenue-generating asset purchases associated with two government contracts. We do expect normative CapEx returning in 2024 much lower. Now I’ll move on to segment details on Slide 12. Starting with Sustainable Tech, what a terrific year. Again, we encourage focus on profit production given the distortion you get from legacy project work off and our participation in unconsolidated joint ventures where just profit is recognized. However, as expected, STS produced organic revenue growth of about 5% for the year, which importantly accelerated to 17% in Q4. Together with strong bookings all year during 2022, momentum is strong going into 2023 and the accelerated performance Stuart covered earlier. STS EBITDA grew to $224 million, with margins at 18%. You see the driving factors here. While there are some mix factors which can cause some volatility quarter-to-quarter, we believe the annual margins will grow with scale as gross profits overweigh a lean G&A structure. As Stuart highlighted, STS is ahead of its long-term targets. We believe this will endure given the combination of market conditions and our offerings, which are in high demand as the world progresses on decarbonization goals. In government, adjusting out OAW revenues grew 10% in total, 7% of which was organic. Growth was distributed with the biggest drivers being our work in the European Command international and space. EBITDA margins were terrific at about 10.4%, reflecting really strong project performance, high award fee scores, higher consulting mix and an asset sale, but offset by the FX devaluation that I mentioned a moment ago. Now move on to our capital position and deployment matters on Slide 13. So at a high level, we continue to build a stronger balance sheet and liquidity position over this past year, I’m really pleased to see that. Business resilience, progressive growth in EBITDA and record level operating and free cash flows drove overall leverage down by almost 0.5 turn to 2.1 times EBITDA over the course of the year. And despite deleveraging, we continue to make modest but highly strategic investments in acquisitions. We increased our buyback authorization and we bumped up actual buybacks to over $200 million in 2022. This plan was deliberate. We wanted to capitalize on our strong performance to build financial capacity, position ourselves for prudent deployments to deliver our long-term targets and manage our capital structure prudently amidst changing credit market conditions. Within those goals, we have been positioning to pursue several different paths to navigate through the maturity of our $350 million convertible notes security, which occurs and matures in November later this year, November 2023. Fortunately, our improved capital position and business resiliency gives us options on how to resolve this maturity while protecting shareholder value. As KBR stock price has gone up about 2.5 times since the issuance of the notes in 2018, the convertible premium is well in the money and above the 100% premium protection achieved with the call option we purchased at issuance. At a KBR stock price of $50, the incremental value we owe the holders of the securities above the $350 million notional amount is about $145 million. So to take it out, it’s about $500 million all in. And all of this is payable in either cash or shares at our election. We do have sufficient capital to resolve the maturity and the convertible premium in cash and that’s our going-in plan, cash. We expect to use a combination of cash on hand, cash flow generated during 2023, committed capital lines – sorry, committed capital under our lines of credit, and that today stands at about $700 million and stock buybacks to manage settling the convertible notes and avoiding shareholder dilution at the same time. Our goal is to have no dilution from now through the end of this year while resolving the convertible. We will also be opportunistic as well should favorable conditions present themselves. For example, if long-term debt capital can be raised at attractive rates, we may refinance some or all of the convert. However, we have no intention of using another convertible instrument to refinance the existing notes or for any other reason. While extinguishing the convertible is our short-term deployment priority, our long-term strategy remains the same. Our deployable cash target of $3.5 billion through 2025 is unchanged. And we expect to continue deploying cash in a balanced fashion and at levels consistent with achieving our long-term targets. Stuart hit this earlier on. We will continue to pursue strategic M&A opportunities. However, we expect the proportion of buybacks to increase given the scale and diversification we have built with previous M&A and considering the attractive set of organic growth opportunities we see in our addressable markets and in our new business pipeline. We also remain committed to paying an attractive dividend, which has been in our stated deployment strategy since 2019. And with that, I’ll move to the next slide, Slide 14. We’re really pleased to announce another increase to our regular dividend to $0.135 per quarter or $0.54 on an annualized basis. This is an increase of 12.5% and marks the fourth consecutive year of dividend increases to our regular dividend. These increases have averaged 14% over this same period, reflecting KBR’s consistent level of growth, profitability, and strong quality of earnings with high and steady conversion of net income to cash flow. And while not shown here, the increased level of $0.54 per year represents a dividend payout ratio of roughly 20% as measured against 2023 expected net income and free cash flow. Now let me cover Slide 15 and our forward guidance. We’re initiating 2023 guidance with $6.9 billion to $7.1 billion in revenues, representing growth over 2022 by 7% at the midpoint. EBITDA is guided at $715 million to $745 million, approximately 10% growth and adjusted EPS in the $2.76 to $2.96 range. To be conservative, we’ve assumed no move activity for HomeSafe in our 2023 guide. Also for EPS, our guide does assume we will avoid any significant dilution from retiring the convertible notes, consistent with the goal and the capabilities that we have that earlier stated. Tax rates are expected to be consistent with recent history at 24% to 25% and cash flow is expected to remain strong and commensurate with earnings at $425 million to $460 million. So that completes my wrap-up of a truly successful year for KBR in 2022 and also a really healthy outlook that we’re quite excited to undertake for 2023. With that, I’ll turn it back to Stuart.

Thanks, Mark. Great job. Let’s move to Slide 16, the final slide of today. Just – it’s been about a long presentation, lots to take in. So just to give you some key takeaways from today. Firstly, I mean our commitment to make KBR an absolutely great place to work for all is unwavering, and we made good progress advancing our people agenda in 2022, and we’ll continue to work that. We delivered in the year doing what we said we would do and frankly, outperformed with sustainable technology, earnings growth and cash management being absolute standouts. We presented multiple strategic pathways to achieving our growth targets as we head into 2023 with circa 70%, 7-0% work under contract. In 2022, we returned more capital to shareholders than ever and as Mark presented, that is set to increase in 2023 and through to 2025, which gives us increasing confidence in delivering a 2025 adjusted EPS target of $4.75. Now I’ll hand over the call back to Charlie, who will open up for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Steven Fisher of UBS. Steven, your line is open. Please go ahead.

Thanks. Good morning. So just one question on your 2025 target. I guess, Mark, given that it assumes roughly a turn higher of leverage than you are at now. How committed are you to putting that turn on? Or are you considering sort of an acceptable outcome of a lower EPS goal if you don’t find deals that meet your criteria? I know you have a good awareness of discipline on M&A. I think, Stuart or Mark, you may have said that we’ll see an increased proportion of buyback. So how are you thinking about that turn of leverage in there?

Well, we are confident that at our scale and our diversification and multiple paths to get there, as Stuart said, we can lever up in this type of environment. Obviously, we’ll be cautious if environments get extreme, but we – the outlook looks reasonably within our control in the credit markets to lever up responsibly at that level and to deploy more capital going forward that Stuart clearly suggested. So we’re very confident in our ability to perform in the organic business. We expect to continue to do some tuck-in M&A where we find really attractive opportunities. And as we signaled quite clearly, we’re very comfortable with our outlook to the extent that buybacks are increasingly more attractive for us, and we’re comfortable levering up in doing so at that level. We think that’s a very responsible level 3.0 given the scale we have and the diversification and multiple pathways to deliver. So answer – short answer, yes, Steve, to do at that level.

Okay. Great. And then I know you said that the organic growth was in line with your targets. Can you just give us what that organic growth was and how you see that developing over the course of 2023? And if there’s any color on how that varies within the four Government Solutions segments that would be great.

Yes. When you look at the GS business, we’re right in line with the targets that we have had for some time, 5% to 8% were right there. And we’re comfortable with that. We have multiple path ways to get there. We cite, as Stuart mentioned, RDT&E is a great growth, military space and space superiority is doing well for us. The international piece continues to do incredibly well. And so that’s our target for GS and separate from that STS is much higher as you would expect. And that embodies the work under contract position we have coming into 2023.

Okay, thank you.

Thank you. [Operator Instructions] Our next question comes from Gautam Khanna of Cowen. Gautam, your line is open. Please go ahead.

Yes. Hey, thank you guys. Good morning.

Good morning, Gautam.

Hi, Gautam.

So I had a question just on the assumptions on HomeSafe. You mentioned there’s no moving that’s anticipated in 2023. Could you just talk about what you’re actually anticipating to recognize in terms of revenue and any associated EBITDA contribution this year and how that plays out in 2024 and when you get to full run rate [indiscernible] revised.

Yes. I mean we decided to take a very conservative view in our 2023 guide, and Mark explained that, that we’re going through the transition period. Everyone knows that it runs for most of this year, and we expect it to start in the fall. But we decided just to be very conservative and not include any move. So any moves would be upside from our position today. And the ramp-up going into 2024, 2025 is as we expressed earlier, we think about that cadence moving up sort of $0.5 billion every six months as we move through into full cadence in 2025. So that’s kind of where our thinking is at the moment, that’s the basis of how we’ve structured our targets and these things. I think the way we’ve done it, Gautam, again, is conservative. But as we get closer to the end of the year, as we sort of get, I guess, further embedded, I think that we’ll be able to give you more clarity. But until then, that’s the assumptions that are embedded and it’s better that we are conservative and surprised to the upside than the other way around it.

Thank you.

Thank you. Our next question comes from Bert Subin of Stifel. Bert, your line is open. Please go ahead.

Hey, good morning and thanks for the question.

Hey, Bert.

Mark, maybe just a follow-up to some of your comments on an earlier question. If you look at Government Solutions, organic top line growth sort of bounced around, obviously, a variety of items in there. Do you still see the 5% to 8% organic growth CAGR is reasonable when we strip out items like HomeSafe. And if we look across the segments, it sounds like in your commentary that D&I and RDOFs are ahead of that range and maybe international and sciences space are behind. Is there a path to those latter two catching up in 2023? Or is that more of a 2024 story?

Our business units continue to impress us each year, one ends up on the top of the list and so forth. So they do rotate a bit in terms of their contribution. In 2022 international and space and science were really strong. But we really finished the year with a really good pace in D&I and that was absent of some pass-through that pushed to the right. So we feel great about our positioning on our contract vehicles in D&I and the increased focus of that type of threat that we serve in the D&I market. So we believe that will be a reliable driver of growth in both 2023 and 2024 and beyond. Science and space, those are clumpy procurements, as we’ve mentioned. So we do have some on-contract growth, but we are dependent on the big things coming to market, and those are a little harder to predict. So that one Steady Eddy for sure, great performance and choppier growth. And so it’s hard to say how much happens in 2023, 2024, 2025, but the overall addressable market and our positioning there couldn’t be better. So I think that we’re – as others have said and experience, the procurement decisions coming out of the government were not very strong during calendar 2022 across the board. Our book-to-bill reflects that but we’ve got great work under coverage, and we expect to produce the growth that we talked about towards the low end of our range on the long-term targets for 2023, given that condition but the atmospherics in spending in this area and our positioning are really right for the long-term, and that’s why we’re so comfortable with the long-term targets.

Okay. That’s super helpful. And then maybe – I’m sorry, can I start.

No, go ahead. I just asking that if that was helpful.

Yes. No, that was great, Mark. Thank you. I was just going to say maybe switching to the STS side. Stuart, you mentioned in your prepared remarks that STS is essentially two years ahead of schedule to that $300 million EBITDA target. What’s your visibility like maybe both on the near and medium term, like as we think about 2023 and into 2024 and 2025? Is the conviction that, that continues to grow beyond 2023 driven by the fact that you have line of sight to that growth in your pipeline? Or is it just in general, what you’re seeing in terms of demand for ammonia, LNG recycling projects sort of across the gamut?

No. I mean, my excitement actually is from both the market drivers, but also the fact that our pipeline is super strong. We’re entering 2023 with quite high levels of work under contract and higher than probably some previous years. I think, as Mark said, scale will drive margin increase. We still got a bit of work off of legacy EPC projects that, again, these reimbursable long-term ones are coming to an end this year, but we’ve got a bit of carryover that will again, help drive margins up over time as those work off. So I think our visibility is very strong into 2024, 2025. I think we are super excited about the growth dynamics not just in what we do in volume, but the margin return associated with that volume, the quality of earnings in that business is terrific. And everyone forgets it actually runs on negative working capital. So really, the cash characteristics of STS is absolutely terrific. And remember, we’ve got customers today that are very cash rich. And we’ve got energy security challenges, we’ve got decarbonization thematics and we’ve got, obviously, energy transition and hydrogen opportunities. So I often talk about this being a perfect storm, and I think it truly is and it’s happening on a global basis. And I’m super excited about where STS is going. And I think we’ve proven our thesis that it was right to move away from commoditized construction. It was right to get out of EPC laps on. It was right to actually reposition the business to high-value differentiated capabilities. And I think it’s – that thesis is proving out well.

Great. Thanks so much Stuart and Mark.

Thank you, Bert.

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Jerry, your line is open. Please proceed.

This is Adam Bubes on for Jerry today. Thanks for taking my question. I was wondering if you can update us on the prospect list in sustainable technologies. Particularly, I’m interested in hearing more about the mix and how big these projects are in the pipeline?

Well, it’s a mixed bag really. I mean I think the prospect pipeline, as I said previously, is super exciting and very attractive, and it’s multifaceted from small, medium and large as you would expect, across the globe and the scale of our portfolio. I mean in the IP world and what we do in sort of technology-led industrial services and solutions, the scale of those is probably less, but the cadence is higher. And the visibility into the future is very strong there. But as you know, the contract values are probably smaller. And sustainable services, we try to show that it’s a 50-50 balance between IP and sustainable services as we are today and moving forward. And the scale of some of those is quite significant up into the $500 million plus to close to $1 billion type work over multiple years. But I think the key takeaway here is its all services. There’s no construction risk involved in any of this, and we’re stuck true to our risk profile and our business model and I think the results are proving that out. So we’ve got stronger visibility into the future because of some of these larger contracts, but it is made up, of course, of high cadence, smaller contracts as well. And that’s been our past experience, and we’ve seen that perform arguably over the last, God, decade, CAGRs in the double digits. So I’m feeling pretty good about that whole mix, entry.

Helpful. And then shifting gears, how should we think about total company EBITDA margin cadence through the year based on project burn timing?

Yes. I mean, logic we detail should be rising. And – but we’ve made commitments. As Mark said, there’s some mix in some of the portfolio-like technology over time and quarter-to-quarter. I think you should look at the overall year’s guide. We’ve been very clear where our EBITDA is and that’s up double digits, 10% from this year. So real earnings growth above our revenue growth. So I think that’s impressive. And then over time, you can see where we’re going in at 2025 targets as well. So I think all up, it’s moving up over time because of scale and mix, and we’re feeling pretty confident about that and the 2025 targets in general.

And I’ll just use the opportunity on that question because of the progressive growth of STS and its economy of scale dynamic the profit mix for 2023 is about 45-55 split first half, second half, that’s a little bit more back-end weighted than we’ve seen in the past, but it’s because of the growth trajectory of STS and the margins that come with that.

Yes. And the work off of these projects that we’ve carried quite forward the low-margin ones, we get rid of them in the first half.

Great. Thanks so much.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Mariana Pérez Mora of Bank of America. Mariana, your line is open. Please go ahead. Mariana Pérez Mora: Thank you. Good morning, everyone.

Good morning.

Good morning. Mariana Pérez Mora: My question is going to be related to Government Solutions. You mentioned that really like several paths you have to grow there, international, local. And the geopolitical environment supports increased spending, especially on defense. But could you please give us some color on how you’re thinking about the political risk of both yearlong continuing resolution next year and actually, the contracting environment or the awarding environment being affected by this political uncertainty? How are you thinking about that?

Yes. I mean, I’m sure that’s a question that everyone in the government space has been asked at the moment. I think there’s a couple of differentiations that KBR brings to the table, obviously, STS is outside all the work we do in government services, internationals outside that. And if STS is 36% in 2023 and GSI is over 20, you can understand that over half of our business is not anywhere close to that issue. The other thing I’d say is that and this is mostly out of the U.S. We have multiple long-term contracts that are critical, and they continue, and we’ve seen this in previous CRs that they continue to be funded. I mean you can’t stop operating the international space station and things like that, for example. We’re very at the tip of the spear operationally positioned as we’ve talked about before. So I do – we are keeping an eye on that. History had shown that, it didn’t really impact the cadence of our performance so much. It was more a catch-up in cash and which we managed as we went into the following year. So it is on a watch list. We don’t think it’s going to impact our 2023 targets at all. And certainly, we don’t think it’s going to impact our 2025 target. So I think we’re very well positioned. I’m not belittling the challenge at all. There will be probably some slowdown in awards. But as long as there’s money on contracts, this will continue. And if they’re critical, then obviously, they continue regardless. So I think we’re well placed. And of course, we’ve got a differentiation with GSI and with STS that others in our peer group, I don’t think we’ve really got to pay, but others in our peer group, so defined do not have. Mark, anything more to add to that?

No, I think well said.

Okay. Mariana Pérez Mora: Thank you. And then you have – how this 70% that you have under contract today of the 2023 guidance compared to history? And do you have any large recompetes coming up this year. How is the timing of that like 30% that is remaining?

The work under contract coming into 2023 is almost identical to 2022 on a consolidated basis. So that’s terrific, and we did well in 2022, as you have seen. And relative to recompetes, we’ve got one pretty significant one in NASA that is underway. And the rest is very small relative to recompete risk in 2023, and it’s actually not that big in 2024 either. So we’ve got plenty of time to work on new bids during that low recompete cycle, which we will do. Mariana Pérez Mora: Great. Thank you.

Our next question comes from Andy Kaplowitz of Citigroup. Andy, your line is open. Please go ahead.

Good morning, everyone.

Good morning, Andy.

Stuart, obviously, very strong growth at STS and you talked about ammonia and plastics, for instance, is helping you drive your growth that’s allowing you to hit your targets two years early, but are you at all worried about potential cyclicality in the business? And how big an impact is the IRA having on the businesses at this point? Or has it really not started yet in terms of that impact?

Yes. I think I mean, I think the thematics that we’ve talked about, and obviously, we are excited about the growth and the growth prospects going forward. I do not believe they’re cyclical. I think that we’re seeing a long – I mean this is a sector that has probably been underinvested in during COVID and probably previously in truth. There was a bit of catch-up to do. I think the whole issue of energy security is at the top table for most countries today. And obviously, that will take a lot of investment in sorting out over time. So that’s not cyclical. We don’t believe – and obviously, the thematic around decarbonization and climate change is not going away and rightfully so. So we don’t see that cyclical in any way. We actually see that over – but what we can see ahead of us being absolutely non-cyclical and a growing part of our story. So very excited about that. So no real concern there at all. And in terms of the IRA, I think what we’re seeing from our perspective is that our customers looking at projects in hydrogen, and we’ve announced some of them recently and looking at doing multiple projects, their rates of return have also gone up because of the breaks that they’re getting and the incentives. And so I think for us, we will see upside, again, not a flash in the pan for KBR, but over time, as these projects come to realization. So I think it’s a very strong tailwind for us in the U.S. I think we’ll see greater investment in the U.S. by our customer base as a consequence. And again, I think that will really shore up and again and support what we’re doing towards our $475 million target. So I think it’s all positive, Andy. And certainly, and to be clear on this, we do not believe this is cyclical. We believe this is certainly what we can see into the future, a continual growth opportunity for KBR.

That’s great to hear, Stuart. So obviously, very positive on STS. The $300 million of EBITDA that you can – due in 2023. But when you look at your overall guide for 2023 and you sort of back into GS, very little EBITDA growth I think for 2023. Is there any sort of mix headwind on GS margin 2023, you’re just being conservative given the noise in DC or any thoughts on that?

Hey Andy, Mark here. I might have misheard Steve’s question earlier, the growth in GS is a little light in 2023 because of the OAW headwind we had in the first part of 2022 that I referenced in my remarks. Longer-term, we’re quite confident in the 5% to 8% organic, but it’s lower than that in 2023 for that reason. Margins are Steady Eddy in government. So we’re 10% or more, and that’s been the case for some time, and we don’t see any major reason to change that looking forward.

Yes. And I think as well, Andy, and as Mark said, the guide, if you take out OAW, it shows growth in government at 9%, 10%. I mean it’s pretty healthy organic growth. And so we’re feeling pretty good about our long-term targets. I think we’re well on pace. And as Mark said, we see no degradation in margins. And in fact, the markets in outside the U.S. are we’re seeing double-digit growth there. And of course, the margins, as you’re well aware, are higher there. So that should help us over the course.

Helpful guys.

Thank you, Andy.

Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie, your line is open. Please proceed.

Hi, this is Chigusa Katoku on for Jamie. Thanks for taking my question. On STS, I wanted to ask how much of the EBITDA improvement this quarter was tied to the Plaquemines LNG contract? And then what is implied for the ramp of Plaquemines in 2023 guide? And when will it get full run rate? Thank you.

Yes. I mean, obviously, there’s a contribution coming through above and below through equity and earnings to what we do in unconsolidated joint ventures. We’ve got a very conservative steady cadence around how we would actually realize earnings from these long-term projects. We take a quite a sensible view across this. But we don’t give details on individual projects per se. So I think at the end of the day, the overall performance of STS is incredibly strong across the portfolio, including what we’re doing in that piece in LNG. And I don’t think we should, in any way, get – think that, that is actually driving earnings is the overall performance that’s driving on – and I want to make that clear so.

Okay. Thank you.

Thank you. Our next question comes from Michael Dudas of Vertical Research. Michael, your line is open. Please go ahead.

Good morning, gentlemen, Jamie.

Good morning, Mr. Dudas. How are you doing?

Good morning. Well, thank you. Stuart, maybe you could share your thoughts on how the integration is going with your recent UK acquisitions, how tenor of that market looks maybe that in Australia, which again, has been a very good market for you. And maybe also to follow-up on your comments about the Middle East and the growth there how sustainable and is some of those larger service projects after the IP awards, could that be – is that an area where you could – we could see some of those in the next couple of years?

Yes. So initially, the integration in the UK, where we’ve – as you know, we acquired Frazer-Nash more recently. But – and VIMA after that, actually, and Harmonic company before all the advisory digital high-end consulting, engineering type space. They all speak the same language. They’ve all lined up behind the Frazer-Nash brand, which is very well known and strong in the UK for those high-end services. And in truth, I think the integration is going as well as we could have hoped for interest. I think everyone’s – upbeat everyone’s together, we’ve moved them into offices that are – have to say are very smart and better than mine, I can tell you. And so I think the employee experience is terrific. I think we’re – where they’re flourishing. And of course, that being part of a winning team is part of works best experience. And I think that they’ve won more work today than they’ve ever won and their backlog is stronger today than it’s ever been. So I think they can see the future. And so there’s obviously stability and growth in front of them. So the people themselves are excited. So I can’t say any more, be more positive. I think it’s they’re performing terrifically well. In terms of the Middle East, the numbers are in the trillions, and they go out to 2030. So I mean, that is not a cyclical event. They are looking at their vision through this decade. And it’s quite consistent across the region. They are driving to be the most – the best, the most I guess, sustainable being responsible to climate change and [indiscernible] you can see that in things like the sustainable cities and things not to mention what they’re doing in the energy sector. So for us, I think we are seeing multi-year activity there. I think you’re quite right, Mike, when we sell the IP, the opportunity to come and then do the sustainable services around that for multiple years, particularly in the maintenance side and things like that is absolutely clear, and we do a lot of that in the Middle East today. So very excited about the growth in spend and our role in our – and as I said in my opening remarks that we’re very much seen as a partner there. We’ve been there a long time. Our Saudization in Saudi is at 50%. So we’re very much seen there as a promoter of employing Saudi’s and educating workforce and being committed to the country and for the long-term. I did miss out talking about Australia. I think Australia continues to grow extremely well. The backlog is strong. There’s a change of government there, obviously, that they’ve got their defense review coming out in March. So we’ll see what that looks like in the next call. But certainly, we’re the threat in the Pacific and it’s clear. Arcus is clear. And so I’m not seeing any slowdown in that consulting arena over the period. So I think all positive, Mike, I don’t like when I say things that are 100% positive in these questions because it sounds like it’s too optimistic, but it’s the truth. And as you know, it’s always a good idea just to tell the truth.

We appreciate the candor. Thanks, Stuart.

Thanks.

Thank you. Our next question comes from Tobey Sommer of Truist Securities. Tobey, your line is open. Please go ahead.

Thank you. I wonder if you could speak to STS margins over the next few years with the additional scale of hitting the revenue targets for 2025 a couple of years early. There’s also opportunity for margins or maybe better described all-in profitability to be better than prior expectations over a multi-year period.

Yes. I think we cover that a bit last quarter because we were performing above expectation. Of course, that’s resulted in where we’ve landed in 2022 and our outlook for 2023 and beyond. You’re quite right. We had set out to move margins up over time, 1% or 2% each year, reaching by 2025, something in the high teens. And I think right now, we can see a path to high teens and certainly low-20s. As Mark said, as we ramp scale and the mix changes, I think there’s absolutely a pathway to do that for sure. But I will reiterate, we’re standing behind our $475 million target in 2025. And I think the beauty of that to me is we’ve got multiple pathways to get there. And obviously, the commitment to the capital deployment strategy is part of that, but I think just the business resilience and the levers we can pull or we’re not a one trick pony. And I think that’s really, really, really, really important in the world today.

And my follow-up is, could you remind us of the industrial logic for both of these segments to reside within the same company? Thanks.

Yes. I mean it’s – I think that industrial logic, we’ve touched on many, many times. I think we’re seeing an increasing symbiotic relationship between them. We report in segments because the market demands that we do that. But the people that we move across between the business units from GS to STS or even within GS or whatever is substantial. And we move key capabilities all the time every day. We are now sort of looking at – we’ve talked about this before, things like the future of hydrogen, much will depend on the management of hydrogen and the capability set that sits with that. It sits in NASA right now for us. And if you think of storage and utilization of hydrogen and where that sits, we’re seeing the Department of Defense setting out net zero commitments. And they’ve got to get there and I think our ability to help them get there is obvious. And so I do think that there’s a lot more behind the scenes that we probably need to do a better job of actually explaining. But I have to say, I think we’re seeing more and more coming together of these businesses over time, more sharing of capability, bringing expertise experience to bear for a solution. And then having to, of course, carve it back up a little bit to report in the various segments because that’s the way we’re kind of structured in the way that we report. So we’ll certainly be showing more on that as we progress.

Thank you very much.

Thank you. Our final question of today comes from Brent Thielman of D.A. Davidson. Brent, your line is open. Please proceed.

Hey, great. Thanks. Good morning. Hey, I might ask the STS upside potential question in a slightly different way, I guess. I mean I think the U.S. was still only a little over 1/3 of the business in 2021. I’m not sure what it flushed out in 2022. But obviously, these incentives afforded by IRA related to hydrogen and then what seems to be this awareness around ammonia, given global supply issues are real tailwinds here, I think for the business. But Stuart, is the upside potential indicative of a much stronger U.S. market you see coming or just simply a sort of business as usual, a multi-region approach that’s been driving the business to date, maybe greater adoption here is kind of icing on the cake.

I think the latter. I think this is a – it’s a global phenomenal. It’s a phenomenon. It’s a global market. We’re seeing – obviously, we talked about the Middle East earlier. So we’re seeing huge investment in attractive areas for KBR. But you’re quite right. I do think there’s icing on the cake with the U.S., I think the IRA bill is really driving a lot of activity. I mean there’s abundance of gas in the U.S., of course and we’re seeing companies like Mitsubishi sign up and Corpus Christi to do to look at doing 30,000 tonnes of ammonia. And that’s obviously to export back to Japan because of the demand that we talked about earlier in Japan. So I think we’re going to see increasing opportunity in the U.S., which almost is our backyard. But at the same time, I think it’s a global business. It’s proven that way for many years. And we – I think so it’s a one plus one scenario here, not one or the other.

Okay. I appreciate that. And then just my follow-up, when would you anticipate including the full value of HomeSafe’s in the backlog? Is it once that full transition occurs?

Yes, I think so. And I don’t think we’ll – I mean we haven’t landed on this yet, but the way that we book backlog is actually very conservative. We typically book backlog when it’s fully funded or we’ve got levels of track record that gives us very good idea and visibility of how work will be liquidated on a particular contract. So I think we’ll – I think more to come on that, but I think that as we head to was at the end of the year, we’ll put some of HomeSafe in backlog, how much that is. I’m not sure whether it will be a year or more. I don’t know but we’ll get visibility obviously at the end of this year as to what we’re going to do in 2024, and that will go into backlog at the appropriate time and we maybe do some cadence around that to get confidence of where we’re at, and then we can predict the future a little bit better. But again, I think it’s better to be conservative there rather than get it over your skis.

Okay. Thank you, Stuart.

Thank you. We currently have no further questions. I’ll hand back over to Stuart Bradie for any closing remarks.

Thank you for all your questions. Thank you for your interest in taking the time. I know it’s a busy time with earnings. So thank you for that. I think just to close, I think the key message to investors is the – obviously, the performance in STS, the earnings growth, which was absolutely terrific. And obviously, the cash generated, which really is part of our story, and we’ve talked about that many, many times and which gives us great confidence around our capital deployment strategy, how we’re going to deal with the convertible this year and how we’re actually moving forward towards that $475 million mark. So with that, I’ll obviously we’ll be talking to investors and analysts over the course of the next couple of days, and but thank you again.

Ladies and gentlemen, thank you for joining today’s call. You may now disconnect your lines.