Title

Presentation

KBR, Inc. beats earnings expectations. Reported EPS is $0.67, expectations were $0.58.

Operator: Good morning, ladies and gentlemen. Welcome to the KBR First Quarter 2023 Earnings Conference Call. My name is Jeslita. I will be your moderator for today’s call. I would now like to pass the conference over to your host, Jamie DuBray with KBR. Jamie, please go ahead.

Jamie DuBray: Thank you, Jeslita. Good morning and welcome to KBR’s first quarter fiscal year 2023 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 earnings presentation. I will now turn the call over to Stuart.

Stuart Bradie: Thank you, Jamie and thanks to you all for taking the time to join us this morning. Now, before we begin our earnings call, I am deeply saddened to inform you that Lieutenant General, Vincent Stewart, U.S. Marine Corps retired, a very distinguished member of our Board passed away this past Friday, sadly. Vince has been a Director of the company since June 2021. And on behalf of KBR’s Board of Directors and all of our employees, we extend our deepest sympathies to Vince’s family. I am personally very saddened by Vince’s passing. He was a tremendous support of the company and me personally and I will always be appreciative of his service and his impact to KBR. Now I will start today’s presentation on Slide 4.

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

And thousands of employees took part in a huge range of activities. And when there were panel discussions on climate change, on mental health, we had community leaders come in and experts come in to talk about topics ranging from personal safety to recycling to giving back to communities, etcetera. And overall, it was a fantastic day of recognizing our complements, but actually renewing our commitment and refreshing that commitment to a Zero Harm culture at KBR. And of course, we carry on a Zero Harm actually throughout the whole year as you know. And recently, our impact to our young professionals, resource group came together on Earth Day for a day of giving back. And in Houston, they took part in a beach cleanup actually in Galveston, partnering the non-profit Galveston Bay Foundation.

So, terrifically well done to those aspiring leaders. So on to Slide 6 and we will just talk a little bit about some key highlights in the quarter and I guess, the business health of the group in general. Firstly, at the highest level, we have really hit the ground running in ‘23. Our people continue to perform. It’s actually outstanding day in, day out. And I really wish to thank them personally for all that they do doing things that matter 24/7. So staying on people on the top left, you will see that already this year, our headcount has actually increased by 7%. That’s quite a jump and almost all these roles are billable. Attrition has come down and it’s kind of stabilized at normative levels, which is really helping and obviously, our increased focus on retention and recruitment is paying off.

So, a big shout out to the folks in the HR function. They have really terrific work. I mean as a services business, the employee numbers are not the only measure of growth, but I think, of course, they are a solid indicator. I did want to highlight in the section today, a program that we came across from the Centauri acquisition that we really identified as best practice at the time and we have now broadened that to the whole of KBR and this is our tech fellows program. Now, this program takes nominations and then identifies and celebrates our leading technical goods. I mean, I think this, of course, shows the value that KBR places on technical excellence. I mean, many of these fellows are actually world leaders in their field. And I have to say they are typically absolutely brilliant and excellent mentors to our people coming through.

I mean this also provides a community and a forum to really innovate and to collaborate in sort of key topics that are really very important for our government and the world in general. We give additional budget and of course additional time so that they can invest in their chosen passion. So, really, really important program. And I think, again, really highlighting our commitment to technical excellence. Moving to our ESG program, Zero Harm. I am pleased to report that our first quarter HSSE performance continues to be top quintile. So, terrific. I mean, you can see the numbers there. But remember, as I always say, good safety is good business. So, terrific performance. From a shareholder value perspective, in Q1, we were awarded 3 green ammonia projects.

These are different levels of maturity and I think we have announced each of them separately, but it’s nice to see when you put them together, I think it really tells the market story and really our position within it. Obviously, this was on the technology IP side of STS. On the Sustainable Services end, we also announced that we have been awarded BP’s hydrogen development work. And now with this, we are working in an integrated and collaborative framework with BP. And I think this is through time will come with pull-through opportunities, think project management, engineering, technical authority over a number of years and BP has actually made a public $30 billion investment committee in hydrogen going forward. So, super exciting. Moving to the bottom left, I will touch quickly on business growth.

We were awarded $3.1 billion in the quarter, which took our backlog and options up to circa $21 million. But importantly, the book-to-bill for the group was 1.4x, with GS at 1.0x in what is typically a slower quarter and STS at 1.9x on a trailing 12-month basis. I mean, I think these are terrific indicators of our continued momentum for ‘23 and of course towards our ‘25 targets. And I think the other key takeaway from this section is that we are feeling really, really good about ‘23 in general with 85% of our work now under contract. And that’s really a high level for this part of the year. Touching on the financials, again, at a high level, obviously, Mark will dig in a bit in a moment. But excluding OAW, our revenue was up an impressive 18%, with margins also up 170 bps to 11%.

Cash was positive albeit seasonally low, plus with cash-out events like comp payouts, etcetera in Q1. These were all as expected. And our net leverage now stands below 2.0. So, really strong balance sheet. Although we beat consensus by a fair amount, we have resisted increasing guidance this quarter. I guess we kind of want to see how the rest of the year plays out. But with 85% of our work secured and with a strong and active pipeline, I will reiterate that momentum is really good. Now on to Slide 7 and we will just touch a little bit more on markets and some of the award and the momentum that comes with that. So Slide 7, so starting on the left hand side, the market across sustainable technology continues to be really biased and it lines up nicely opposite our suite of offerings.

Now, we spent quite a bit of time on STS last quarter and the market drivers that we talked about then still hold today. So, I won’t really go over this again. But our book-to-bill in the quarter once more at pace and we have highlighted a couple of key wins on the bottom left. Phase 2 of Plaquemines was given the green light, a great win in sustainable services. And directionally important, we also secured our first plastics recycling module on the IP side of the house. And I think this demonstrates these projects are now moving into the next phase, the execution phase with proprietary equipment orders. So, clearly, more to come in this area. There are few key pieces of info on top of what’s on the slide. The trailing 12 months book-to-bill excluding, so without Plaquemines was 1.6x.

I just wanted to put this in context to demonstrate how well the whole portfolio is performing. In Q1 alone, we secured 7 ammonia awards, 3 in green ammonia, I highlighted earlier, plus 1 blue and 3 gray focused on additional capacity. So, that’s 7 ammonia hydrogen-driven projects in the quarter. The projects are in different phases, but the key takeaway here is it’s a clear signal to the growing demand across the ammonia hydrogen markets that we have been highlighting for some time. Another key takeaway is that there is a growing mix of long-term contracts in the STS portfolio, which I think should really serve us well into the future. So, Plaquemines, BP hydrogen and the recently announced win for Equinor in Canada are all really good examples of this.

So, all our multiyear giving us greater visibility and quite a bit beyond 2025. Backlog in STS is a touch under $5 billion, which is circa 3x annual revenue, so really good shape. Now on to Government Solutions. Again, the market fundamentals are similar to what we described last quarter. Tensions in Europe and geopolitically in a global context continue. And this is driving increased activity both domestically and overseas in a number of our business areas, but obviously and more noticeably in readiness and sustainment. The defense budget, albeit a little bit or a long way to go to formalize is directionally favorable and lines up nicely opposite where KBR has positioned itself. Space budgets are also up in civil and significantly in military space.

Again, a very nice fit for us. And Mark will cover later our great performance in our space business, which reflects this increased activity. And as I have stated previously, our military space business, which actually sits inside our defense and intel portfolio grew over 20% last year and has had a terrific start this year in the first quarter. Internationally, the increased peer threats are driving closer cooperation across the Western allies, Aukus being a great example of this. And there is increased activity specifically in the advisory consulting arena where Frazer-Nash lives. In what is traditionally a very slow bookings quarter, I think we are paced a bit with a book-to-bill of 1.0x and this does not include the recently announced OMES III award for NASA, where KBR is a minority joint venture partner.

But to give you a scale context, we will add circa 100 people to execute our work in that program. Overall, that OMES III award is approximately $700 million takeaway that we will book our share of in Q2 or Q3 depending on protests. And our book-to-bill does not include anything for HomeSafe yet. Just on HomeSafe, the transition work has passed 50% complete. So we passed that milestone. It’s all going very well and we have made very good progress on the commercial side as we head towards our first moves later this year. There were multiple awards across all our business segments that drove the book-to-bill performance, including increased task orders on LOGCAP in the U.S. and in Europe, some good awards under IAC MAC and the TENCAP contract frameworks, several high-end R&D awards, meaningful on-contract growth in our larger programs, increased activity within our Intel portfolio and numerous consulting assignments.

Now I think this really demonstrates the value of the KBR business model and where we sit in our market. And it kind of ensures that we can go after the big fish, but we don’t rely upon them. You may have seen the new space suit that was demonstrated earlier this year. Axiom is the main contractor. But as you will know, we are a key design partner behind this exciting program. So that’s pretty cool and staying with NASA and a huge shout out to our team as they were awarded the Super Nova award, now that’s the highest safety and excellence award bestowed by NASA. So, quite a big deal. I mean, and absolutely bang on a Zero Harm value. So a great, great win. Overall, I would say the feedback from the business as the award activity levels have gained momentum through Q1 after a sluggish start at the turn of the year which I think bears well for Q2 and Q3.

So in summary, overall, our momentum continues with multiple market factors favorable. Our mission focus and delivery is absolutely top of mind. And I think you see that flowing into our results across the company and we are feeling really, really good about our start in 2023. So with that, I will now hand over to Mark. He will dive into the numbers and segment performance a bit more. Mark?

Mark Sopp: Great. Fantastic, Stuart. I’ll pick up on Slide 9. So as you just heard, we are off to a terrific start for 2023. We are really pleased to see that. We are seeing strong P&L results from both businesses, underpinned by excellent project execution and also tapping growth opportunities, which leverage our differentiated long-term contract base, also our global presence, and our diversified offerings are kicking in. Top line tipped $1.7 billion, which is up 18% on an ex-OAW basis. Just as a reminder, OAW was the large episodic humanitarian effort that we supported in 2021 and 2022 and that contributed about $300 million in revenues at the beginning of 2022 as it was winding down. So, that’s a comparable that we are seeing.

18% growth ex-OAW is quite impressive. It’s fueled by both segments and I will cover those here in a second. Profit margins were excellent at 11% of revenue, with EBITDA growing to $182 million, up 18%. And not shown on this slide, EBITDA was up circa 30%, excluding OAW which demonstrates terrific margin expansion year-over-year, fantastic. This level of EBITDA is a high watermark for quarterly operating profit for the new KBR. Margins of 11% were driven by both segments, where STS surpassed 20% and government profitability continues to perform consistently at the targeted 10%. The strong EBITDA, coupled with normative below-the-line items, produced adjusted EPS at $0.67 a share. With such strong performance in Q1, particularly in STS, we are ahead of pace for 2023 and we will keep you posted on this as the year unfolds.

As for cash flow, results were as expected. Cash is usually low in Q1 due to incentive payments and this quarter was also affected by the $25 million headwind from early collections we had back in Q4 and also some other timing items. In addition, working capital demands went up due to the strong sequential growth we saw since Q4. We expect to get back on pace in later quarters this year. And on a positive note, we collected the second and final installment of the Ichthys settlement of AUD90 million, a really nice boost to treasury in the quarter. Now I will go to Slide 10 for more color on the two segments, STS and Gov. And starting on the left, STS revenues were up almost 50%, all organic, amazing. This reflects everything we have been saying, technology offerings that are helping the world become a greener place, capabilities which are helping stabilize the global energy security challenges and a world class team executing its business extremely well.

We are seeing strength in growth in all verticals within STS. Ammonia/hydrogen, olefins, clean refining, plastics recycling and sustainable services all involved in enabling really important projects all around the world. With all of this going on, the team keeps a keen eye on the longer term as well. We always have sought to identify new technologies in this space, then acquire them, make them better and leverage them across our global installed base with a highly effective sales team. In Q1, we added sustainable aviation fuel with Swedish Biofuels, Acetica for carbon capture usage and SCOREKlean for zero carbon ethylene cracking using hydrogen burners. Acquiring and developing technologies in this fashion served us very well leading up to the strong market conditions and the performance we see today and continuing to do so helps drive STS in being both a short-term and long-term growth story.

EBITDA for STS blossomed to $82 million, with margins increasing from 17% to 22%. This profitability strength reflects good license mix, economies of scale and favorable closeouts on strong and consistent execution. While not provided here, and as Stuart said, book-to-bill for STS was an amazing 1.9x TTM, but was actually 2.2x in the quarter, continued demonstration of the attractive end market conditions and leadership positioning that we see in this business area. Now over to Gov. Revenues grew 12% ex-OAW also reflecting good market conditions and having presence in areas in greatest need by our customers. While not on the chart, it was really good to see the strong sequential growth from Q4. Specifically, all four business units grew with NGS meaningfully since Q4, together up about $75 million or 6%.

Growth was driven by our readiness and sustainment defense systems engineering and science and space business areas, the pockets of international also doing really well, such as technical consulting and readiness and sustainment the majority of this business reflects long-term recurring base operations and supply chain programs serving the armed services community all over the world. This includes stable support for the European Command and the Northern Command under LOGCAP V. We’ve talked about that a lot. While that is all indeed firmly in place, our customer has also added substantial increases to support the allied effort to support Ukraine and overall security in Europe. We expected quite a bit of this in the 2023 plan and with high confidence, this will endure through the year and probably beyond.

We will certainly keep you posted. Science and space grew 10% year-over-year, so kudos to Todd, Lori and the team on this, fabulous. Our operations focus has benefited from increased NASA and commercial space mission activity plus military health work that we do in this business unit. This team also continues to receive stellar award fee scores, demonstrating superb service to the mission as it always does. Our work here continues to drive enormous pride across all of KBR. Margins for Gov came in at 10%, consistent with target and also recent performance. On to Slide 11 and capital matters. So with strong EBITDA growth, net leverage registered down and finishing up 1.9x for the quarter. Last year, we signaled being cautious with debt in light of the interest rate environment, and we are indeed executing that strategy, but we’re also still deploying meaningful cash for tuck-ins and returning capital to shareholders.

M&A is selectively in play. And as discussed earlier, we added a couple of new technologies in STS this past quarter. In addition, buyback pace was kept strong at $50 million in Q1 plus another $11 million for benefit plan offsets. And finally, in Q1, we were opportunistic with the swap curve and bumped up our fixed to float ratio to about 90%. This will drop down 5 to 10 points when we retire the convertible securities later this year, this fall in particular. The average interest rate for our current debt stack is around 4%. The combination of high 6 to float percentage and the low average rate provides significant stability in the interest outlook relative to driving toward our 2025 financial targets. And finally, for me, on Slide 12, our forward outlook.

Just quickly with an excellent Q1 and with 85% of our outlook under contract, we are affirming the ‘23 guidance for all measures. The strong start also shifts our weighting of earnings contribution over the course of the year. We’re now looking at a 48-52 split of EPS first half to second half. Thank you. So I’ll turn it back over to Stuart to finish it up.

Stuart Bradie: Thank you, Mark. A terrific job. As always, on my final slide today, Slide 13, I’ll just touch on a couple of key takeaways. I think in summary, an absolutely terrific start to the year, sequential growth in all business units, margin expansion, adjusted EPS ahead of pace, really, our people are truly delivering significant value to our stakeholders. Book-to-bill was excellent at 1.4x on a trailing 12-month basis and more importantly, the quality of work we’re winning and the associated earnings are in key strategic areas. Work under contract is now 85% for 2023, and this is a very solid position to be in after Q1. We’re very well positioned in attractive markets of the future. And I think our recent wins really demonstrate this. And thus, we remain absolutely committed to our 2025 targets. So thank you, and I’ll now hand back to the operator, Jeslita, who will open the call for questions. Thank you.

Operator: The first question comes from the line of Bert Subin with Stifel. You may proceed.

Bert Subin: Hey, good morning. And thank you for the question.

Stuart Bradie: Thanks, Bert.

Bert Subin: Stuart, maybe just a follow-up to some of the comments on STS, how should we think about the sustainability of the current demand backdrop? You noted several material wins over the last couple of months. But I think the concern is if the global economy does start to head lower, ultimately, you could see some mix shift away from some of the licensing activity you’ve been doing back towards services and that could lead EBITDA down. Is there a concern – any concern like that in the near future? Or do you think the high book-to-bill and the pipeline gives you a pretty good runway on when you’re thinking about our EBITDA rate?

Stuart Bradie: Yes, we’re certainly seeing no signs of that, Bert. I think the latter, I think, really our book-to-bill and activity levels in our pipeline in the licensing side and the IP side of the house are also driving that performance. And on the Sustainable Services side, the margins we’re attracting there given the high nature of what we’re doing and the capability we have in that arena are also very factor. So we don’t see any margin pressure downwards at the moment. We’re sticking to a guide, of course. And – so I think it all bears well looking forward. And as I said earlier, I think one of the key takeaways, which is kind of a little bit different dynamic we’re seeing in STS as well, we’re being locked in for the quality of our resourcing into more longer-term programs like the BP hydrogen work.

So I think that really gives us better vision into the future than we probably historically have had in that business area. So it’s a really good mix at the moment. We’re feeling really upbeat as you can tell.

Bert Subin: Okay. Great. Maybe on the other side of the business, you guys mentioned in your release that ONE contract growth in Government Solutions is been a tailwind with Science and Space trending better. I think the expectation was that segment would be a little slower growing this year. But now you have that benefit paired with a nice JV win at Goddard Space Center as that trajectory looks like it’s improving. Do you see a path to perhaps the higher end of the 5% to 8% core growth in Government Solutions this year, obviously, excluding OAW and HomeSafe?

Stuart Bradie: Yes. I mean, I think Mark commented on that. I think the sequential growth across all the business areas in Government was 6% from Q4 into Q1 of this year, which was a terrific indicator of how that business is moving. I think – we will give you more color as the quarters unfold. I think in Q1, it’s a bit bold to be going out over the skis with that statement. I think – and we’ve done terrifically well with 18% year-on-year growth ex-OAW and long may that continue, but – that’s a high watermark in anyone’s book. So I think that’s probably the best I can give you on that. But we’re feeling pretty happy about the market and where we sit.

Bert Subin: Grate. Thanks, Stuart. And congrats for the quarter.

Stuart Bradie: Thank you.

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

Jerry Revich: Yes. Hi, good morning, everyone.

Stuart Bradie: Good morning, Jerry.

Mark Sopp: Hi, Jerry.

Jerry Revich: I’m wondering if you could just expand on the Sustainable Tech Solutions performance. in the quarter? Feels like that was ahead of plan. Can you just talk about what was the benefit of favorable closeouts versus things that we’re seeing flowing through that will continue into the second quarter plus?

Stuart Bradie: Yes, I think, our long-range targets remain as they are Jerry, at sort of high teens and the margin side, and I did comment that we think that business could get into the low 20s. And I think we’re seeing that on various quarters. So I think we were doing extremely well and focused on delivering. We seem to have quite favorable close outs of projects on an ongoing basis. And, I think you Q1 was no different in that regard. So I think that – I think the key takeaway there is that we are at a pace, I think the book-to-bill shows the continued activity in that segment, the team has done an outstanding job, as Mark remarked, and in his prepared remarks, I think that teams globally is doing terrifically well and delivering for our customers and thus for our stakeholders.

So I think that’s probably the best way to describe how that business is performing. And obviously, as the U.S chips that will give you more. But I think, I mean, so far, we’re very much well, well targeting guidance.

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

Stuart Bradie: So there are no parts of the business with a negative variance. I’ll say that right off of that. I think the – and I get your question on consensus when you added to the quarter one performance. But I think we’re still well within our guide with the consensus numbers each quarter plus Q1, albeit not at the middle of the guide, I’ll give you that. And it is early in the year, and we – as we come back in Q2 and Q3 and the business continue to form, we perform, we will review where we are in our guide, but that’s kind of where we sit. We’re still with consensus still trending within our guidance range.

Jerry Revich: So it sounds like we’re towards the high end, just to put the pieces together.

Stuart Bradie: Well, I think the mass would tell you that.

Jerry Revich: Super. Thank you.

Operator: Thank you. The next question comes from the line of Jamie Cook with Credit Suisse. You may proceed.

Jamie Cook: Hi, good morning. And congrats on a quarter. Sorry to follow-up again on the STS. Obviously a great EBITDA performance. Do we think about it? I mean it had a nice jump sequentially in terms of EBITDA. Is the $80 million some, is that the run – how we should think about the run rate over the next couple of quarters? And then could you just – congrats on the Plaquemines Q award, can you just give a little color sort of on the size of that, the scope of work you are doing relative to the first contract sort of – and that starts to kick in? Thank you.

Stuart Bradie: Yes. Thanks, Jamie. The I mean I think the $80 million plus that this quarter did benefit with, as we said, some project closeouts and the mix. We’ve given a guide very clearly of $300 million for the year in STS, and we intend to do that with a fair wind, we may do a little bit better, but there is no commitment there. I think $300 million is the number we’re targeting. And to be honest, if we deliver that, we’re 2 years ahead of pace. And remember, the characteristics of that business, whether it’s negative working capital and things, it’s a terrific business. So all good. In terms of Plaquemines, the first phase was 13 million tons or so with all the associated infrastructure to support 20 million tons.

And the second phase is for the balance of the 7 million tons of LNG. So that’s the way to think about it in terms of scale. It’s circa – for us about $800 million – $800 million going into the backlog. But one of the things I was keen to point out is on a trailing 12-month basis, that added a backlog. When you look at the rest of STS, we still achieved a book-to-bill of 1.6x, so excluding Plaquemines. The whole portfolio is doing tremendously well. But I do think the other – as I said earlier, in the questioning, I think the other change, I think, Jamie, is the long-term nature of some of these contracts that really underpin future performance.

Jamie Cook: Okay, thank you. Congrats.

Stuart Bradie: Thanks, Jamie.

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

Sean Eastman: Hi, team. Nice start to the year. Just quickly wanted to start on a clarification one. If we zone in on this STS kind of outperformance on margins in the first quarter, are we looking at outperformance on the core licensing business? Or are we seeing closeouts on the legacy portfolio in that number?

Stuart Bradie: It’s probably not so much – some legacy, Sean, but not too much. I mean, we’ve got ongoing services contracts. We’ve got ongoing, I guess, technology projects that we close out progressively. And as we close those out, we retire risks and we retire risk in their favor. We book the upside and that’s an ongoing part of that type of business. And I think if you’re prudent, then you get the upside and if you’re conservative, then obviously, you get no downside surprises. So that’s kind of how we manage that business. So I think it’s a mix there.

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

Stuart Bradie: Yes. I mean it’s – some things are – well, that whole negotiation is total with our control. But the way that we think about it is that we’ve got certain attributes within KBR that are very different to perhaps some of our peers. We’ve got the STS business got nothing to do with that debt ceiling. As you’re aware, we’ve got the international part of our government business similarly that’s with it. And we’re positioned very much at the operational end of what we do for government. We’ve talked about this often. The things that are happening in Europe will not be switched off. They just can’t be given the circumstances there. The work we’re doing in Space can’t be turned off because of the things we do there, etcetera, etcetera.

So we’ve also got over half of our GS backlog, as you know, in long-term contracts that are funded. So we’re feeling pretty good about a lot of that. So we’ve got certain attributes that we think we’re very well positioned, opposite these key priorities. So I think the debt ceiling piece aside, I think we’ve talked about inflation risk before and how we’ve managed that. So I think we’ve come through that very strongly. We’ve seen the shifts on really throughout geopolitical risk. And again, I think we’re well positioned there to be resilient. And I think that resiliency word hopefully resonates with the investment community on KBR today just because of the attributes I’ve just described. So – we’ve also positioned our business in very strong cash-generative areas of the market.

And I think, again, you can see our leverage and where our balance sheet sits and the treasury team and Mark and I have done a terrific job in sort of derisking that element and given uncertainty with the swaps that Mark described. So I think all up, we’ve derisked the balance sheet. We’ve derisked the outlook and we’re in attractive markets with a very long book of business that gives us more transparency than most into the future. And with the attributes of STS and GSI with the U.S., I think that gives us certain factors that are very positive in that regard.

Sean Eastman: Makes sense. One last quick one for me. Last month, we saw this Australian defense strategic review come out. It seems like there was some moving pieces there, some reprioritization of spend being discussed. We weren’t really sure what to take away there. So just curious on KBR’s take on that one.

Stuart Bradie: Yes. It’s just come out. We’re still sort of digesting ourselves. Sean, obviously, there is a lot of focus on AUKUS and the Navy in general which we’re very well positioned, opposite that. We are also strong in things like Mission IT, which obviously, is all well funded going into the future. There will be some reprioritization. So we will probably have to come back to you on that, but I don’t – it’s not certainly changing our guide or outlook.

Sean Eastman: Understood. I will turn it over. Thank you.

Stuart Bradie: Thanks.

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

Andy Kaplowitz: I guess close enough. How are you doing, guys.

Jamie DuBray: Hi, Andy.

Stuart Bradie: Hi, Andy.

Andy Kaplowitz: So Stuart or Mark, you mentioned the 7 ammonia awards in Q1 and the undated plastic recycling modular plant, helped you deliver that sort of 1.6x trailing 12-month book-to-bill ex-Plaquemines, which seems like maybe even more of an acceleration in those key markets in the quarter. Is that the case? And does that mean you can sustain so at 1.6x that you’ve achieved at LNG moving forward?

Stuart Bradie: Certainly, the market would – we feel pretty good about the market and the pipeline and obviously, it’s been a month or so since the end of the quarter, and we’re not seeing any of that slow down. So I think that as well going forward. Can you achieve that exact number every quarter? Andy, that’s difficult to predict. There will be some ups and some downs in all of that. But I think overall, the key message and the takeaway is we’ve got a very strong backlog already secured in STS and with the whole group over 85%. Now I think we’re in pretty good shape for ‘23 and a lot of focus is obviously booking business as we move into next year already.

Andy Kaplowitz: And then Stuart, I think last quarter, you had talked about maybe awards in space starting to sort of – you are watching for an acceleration of – was it maybe we’re seeing that. You mentioned a 10% growth in space. Does that have anything to do with sort of the Artemis program progressing? Like what do you see for that particular area? And then I’d ask you the same thing about European Command. It seems like you’ve been expecting the revenue step up there? But it seems like it’s now coming in 2023?

Stuart Bradie: Yes. Certainly, the Artemis program and the flow-through of our existing contracts, I think that’s what’s driving the on-contract growth there. As Mark also said, the health side of the services is also seeing quite substantial on-contract growth. So, it’s all going, which is terrific. And that obviously doesn’t include the military space piece I have touched on, which sits inside our intelligence portfolio. In terms of what’s happening in Europe, I think that ultimately, that program in EUCOM has moved away really from contingency funding as OEP into European Command O&M funding, which I think directionally sets the tone that we think this is going to be more enduring than less. And so I think there is probably more stability around that. But you are right, we have seen growth from sort of last year to this year about in our forecast about 75 a quarter.

Andy Kaplowitz: Appreciate it.

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

Steven Fisher: Thanks. Good morning. I just wanted to follow-up on the guidance discussions earlier in the Q. I know it’s early, and you don’t want to get out over your skis, but I am just wondering what are some of the key things you are looking at to update guidance or uncertainties that might be resolved, is it just time, or is there any risk on the debt ceiling discussions in your mind shifting around timing of awards? Is it maybe something with this European Command that maybe troops could get pulled quickly? Anything kind of more specific you are looking for that’s an uncertainty that you are looking for to be resolved?

Stuart Bradie: Not really, Steve. I think that it’s a time issue. We just want to get a few more months under our belt. And as you know, we are quite conservative. We – and I think that’s prudent. And we have de-risked a number of factors, I am touched on them already. I won’t go into them all, but obviously, things like our capital situation and where we set sort of interest rate risk and things like that has all been mitigated. And we have secured the work essentially to deliver. And I think – I mean people often forget, you have got 85% of your work under contract. But ultimately, in a normal year, we get a number of things that are small and they make up 15% to 20% of our revenue base, and we don’t know what they are until they hit a few weeks out before they hit.

So, we are feeling pretty good about the year. So, it’s more about time and just solid execution and a focus on delivering for our customers. And I think if we do that, we get a few more months under our belt, I think we will talk – talking about, but this again, I am sure in Q3. So, it’s really time.

Steven Fisher: Got it. And then curious what you are seeing in the M&A pipeline? And to what extent does your convert settlement later this year impact any M&A motivations, or how does that convert also affect your buyback motivations as well?

Mark Sopp: Hey Steve, Mark here. M&A pipeline is fairly consistent. I wouldn’t say there is a major trend one way or the other. There is always things happening in government. And as you see, and we are really pleased to execute a few additions on the STS side, which doesn’t happen very often. Small, but potentially really important in the long-term as we continually tech refresh that business. Relative to the balance sheet, we did say very clearly in our last call, less so this time, but nonetheless remains our number one capital priority this year is to settle the convert and get that behind us, and that does involve a meaningful amount of capital, circa $600 million at this stock price, starting today at least. And so we do need to build the treasury for that.

We do have adequate liquidity to take care of that and do tuck-ins and don’t be surprised if you see those. But otherwise, the priorities are very clear and unchanged and we do remain constructive on M&A as opportunities present themselves.

Stuart Bradie: And I think in terms of buybacks, Steve, we have started the year with a strong cadence. I think if you look back to Q1 last year, we were slower out the blocks, and we are committed to that the capital deployment and the ‘25 targets. And obviously, once we get through the convert later this year that will free up liquidity to sort of fulfill on that promise.

Steven Fisher: Thanks there.

Operator: Thank you. The next question comes from the line of Gautam Khanna with Cowen.

Gautam Khanna: Many thanks guys. Good morning.

Stuart Bradie: Good morning Gautam.

Gautam Khanna: I wanted to ask about HomeSafe and just make sure I understood. So, you mentioned you have transitioned over half. If you could just talk about if your expectations are the same as they were with the $0.5 billion every six months increase? And how – how the phasing will be in ‘24 and in ‘25? What do you think peak rate will be? And then if you could also talk about, how would it hold up in an extended CR? Like let’s just say we had, for some reason, budget continuing resolution for all of next fiscal year of the government, would the program be impacted at all at the ramp? Thank you.

Stuart Bradie: No, I don’t think the ramp will be impacted at all. I think that’s an ongoing commitment today, and that will continue into the future, Gautam. We don’t see any impact with CR in the HomeSafe program. In terms of the ramp, we have said that as we head towards the end of this year, we hope to get some moves under our belt and the ramp will go up quite significantly into the summer of next year, which is the domestic busy period. And so that ramp will be quite marked, I think into Q2 and Q3. And then it will probably come off a little bit, but the international moves will then pick up at the end of the year, the first quarter of the following year. So, I think that’s sort of ramp and we reckon that will be, as we know, it’s a $20 billion program over with a ceiling value over 9 and a bit years.

And that mass with, I guess inflation will mean that the cadence might be a little bit above $2 billion in total. But I think as we get closer to the end of this transition period, I think only then can we really truly come back and give you more accurate data around that, but that’s the way to think about it just now in your models. And I think the margin, we have kind of resolved the – as you know, we have got inflationary protection in the contract with CPI adjustments, and we have dealt with that with the government now. That’s the for this kickoff period. So, I think that’s the good news we get to revisit that next year again, of course. So, at least the revenue basis is clear and now we are booking on the supply chain side. So, we should be able to come back to you obviously well before the end of the year with sort of like true margin expectations as well.

So, you just have to give us a little bit more time, Gautam, but that’s the kind of thinking at the moment.

Gautam Khanna: Thank you.

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

Michael Dudas: Good morning gentlemen and Jamie.

Stuart Bradie: Good morning Michael.

Michael Dudas: So, just a follow-up on some of your technology comments. I thought plastics Mura was quite helpful and ammonia has been quite visible and strong with your company and others as well. Are those two areas where we can see the cadence pick up on those opportunities, or is it going to be more balanced in some of the more popular and more forward technology, especially on the emissions and the side on some of the legacy energy companies who are really starting to lean into that moving forward?

Stuart Bradie: Yes. I think it’s a bit of both, Mike. You are right, the cadence of a lots in ammonia and I think directionally getting that first module going with plastics recycling, I think obviously more to come on that. It’s very exciting because, obviously, the volume increase is significant once you start to get into the execute phase with some of these developments. But as Mark alluded to, it’s in his remarks also, it’s we are seeing it in olefins. We are seeing it in greener refining or cleaner refining solutions. And across our portfolio, it’s really not one or the other. On the sustainable services side of our business, we have presented that last quarter to show you the relativity in size of those bubbles that we presented, if you remember.

And that side of the business that’s really driven by decarbonized solutions around energy security is going extremely well also. So, I think it’s a combination. And it’s not – certainly not a one-trick pony. I think it’s a multifaceted market driver thing, and we are seeing it not just in one market either. It’s a very global phenomenon, as you can tell from some of our press releases.

Michael Dudas: And my follow-up is with some of the newer technologies that you have acquired recently. How, the visibility – are those early stage, are those that we may see some more order cadence come through the next 6 months, 12 months or 18 months? Are they longer term play? Like how do you guys think through when you are looking at these technologies as it’s late kind of get closer to the implementation stage or stuff or opportunities for KBR to kind of enhance and then really push forward? Thank you.

Stuart Bradie: Yes. I think each is a little bit. They are both in reasonably early stages. Two, we have acquired and one, we have developed. I think the staff, the sustainable aviation fuel, we have been courting the Swedish biomass company for a long time, and I think we have now obviously acquired the rights for that technology globally. And it’s quite unique. It’s actually been approved by DARPA, which is – makes it more applicable to defense and I think a strong synergy play there into the future as the DoD tries to meet its net zero commitments. But it’s also quite unique because it’s a true drop-in solution. So – what does that mean? It means you can actually just physically drop it into a tank of existing aviation fuel and that will work.

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

I can’t give you any numbers yet to support that. But it’s exciting. And of course, we have got a hugely strong track record of commercializing new technologies, and we have got a very strong global sales force to affect that. So, I think it’s directionally really, really exciting. And I think similarly, with acetic acid – acetic acid is actually something that hangs besides what we do in ammonia. It’s a different product stream and the beauty of that particular technology as it consumes CO2 in the process. So, it’s going to be attractive just from that attribute that we can actually take CO2 out and actually use it as a consumable. So again, we think there are great opportunities for that as we go forward. And then the third is really looking at scores, our olefins technology, and really we have done a bit of work trying to make that even more sustainable by introducing hydrogen bonus as part of the solution, which we think will be attractive to our customer base going forward.

So, I think all exciting, Michael, all directionally terrific and but which ones goes quicker and which one goes lower, I don’t know. What numbers they deliver to KBR, I don’t know, but I think it does position us well given the market fundamentals we are seeing.

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

Brent Thielman: Hi. Thanks. Good morning. Hey Stuart, I was curious on the comments about this growing mix of long-term contracts in STS. I mean Plaquemines is pretty transparent. You talked about some others like BP. I guess I am just curious if you see more of a trend where kind of a larger portion of future revenue in this segment will be secured by long-term contract arrangements maybe versus the shorter sales cycle solutions, I think it represented more of the business. Is that the direction of the market, more of a strategic initiative? How do you see that going forward?

Stuart Bradie: Yes. I think that’s exactly right. So, that was the point I was trying to make. I do think directionally, we are going to see more of that. I think as that market gets busy, I think we are not going to jump from one opportunity to the next. We are going to be strategic, particularly with our customer choice and the sort of work that we do and the quality of earnings that’s associated with that. But with that comes key people. And I think locking in resources is all part of the attractiveness of these longer term arrangements. And as a consequence of that, I do think given the activity levels in the market, you will get to see more of that, not just with us, but I think with us for sure and where we are positioned, I think that’s going to be at the higher end, and I think you are going to see more long-term contracts coming through the KBR portfolio and STS.

And as I have said, that’s really what we are seeing today. And I think that the customers are very well funded, of course, and I think trying to get in front of what they want to do from a sustainability perspective and look at their ESG goals, I think we can help them with that. And I think they want the people that help deliver that. So, trending wise, I think it’s a very astute question and exactly the message we are trying to deliver.

Brent Thielman: Okay. And Stuart, Mark, it pretends with this, but obviously, you are getting lost the question about STS and all the different drivers within it. Good possibility, I know there are competitive factors to this, too, that we can see more of a breakout at some of these different moving pieces within the segment just to understand financially where some of the implications are kind of all these moving pieces within the segment, which all seem to be contributing in a significant way.

Mark Sopp: Well, Brent, are you asking about the logic of the two together or something? I kind of missed the second part of that.

Brent Thielman: No, the ammonia, hydrogen, recycling piece, and there is lots of moving pieces within this business, which are all significant. I am wondering if we could see KBR breaking out more of these pieces just to help the financial community understand it better?

Mark Sopp: I think it’s a great question. And as STS becomes more prominent component of the picture. It is up to us to improve our communications here. And so it’s a great business, there is lots of parts to understand things are always changing. Fortunately for us, for the better as conditions improve and we are committed to improving the communications there as best we can, you saw us show more in the last quarter. And we will consider or continue to evolve that as best we can. Breaking out components of a $1.5 billion business, they will have some merit, but I think more scale would be helpful, and we are certainly on a great track to do that with the growth rates we see here. So, stay tuned. It’s work in progress. The team has been working very hard to execute and sell and maybe a little more time allocation to marketing might make sense someday, but I think we are doing the right things from a priority perspective and delivering these types of results.

Brent Thielman: Yes. Understood. Very attractive assets, that’s two I pointed out, but appreciate taking that question.

Operator: Thank you. The next question comes from the line of Mariana Pérez Mora with Bank of America. You may proceed.

Unidentified Analyst: Hi. Actually it’s Andrew on from Mariana today. Thanks for taking the question. I was just wondering if you can give a little more color on the free cash flow step up to the year, just before you are at now, how do you expect to get to like 4.25 to 4.60 range for cash flow?

Mark Sopp: Yes. Thanks Andrew. Fair question. The number does stick out a little bit in Q1. And so as I have said, we did expect a pretty low number in Q1, and that’s exactly what happened. I mentioned timing items in my prepared remarks. We got the incentive payments. We did have an extra payroll. We had some collections that went to the left and accelerated in Q4. So, I mentioned those things. So, we had quite a number of things going against us. We don’t expect that to occur in future quarters and to some degree, the opposite. So, it is looks like a steep hill decline, but we have had very strong cash flow every year. The business model hasn’t changed. We are a capital light, and we are going to work very hard to get those DSOs down and we have got about five days, six days to bring down over the course of the year, but the team is focused on it and we didn’t change guidance. So, we are confident as such.

Stuart Bradie: Yes. And I think Q1 and Q4 are probably the lower quarters, Q2, Q3 being seasonally the higher quarters with typically all these things and things like that, but also lesser holidays in those that was for our quarter. So yes, so we hope to make good progress into next quarter, and we will obviously update that.

Unidentified Analyst: Great. Thanks.

Operator: Thank you. Yes, currently no more questions waiting at this time. So, I would now like to turn the call back over to Stuart for closing remarks.

Stuart Bradie: Thank you. Thank you very much. And again, thank you for joining us this morning. I will be brief, I think and we can all say we have got off to a great start in ‘23. I think lots of attributes with revenue growth, margin expansion, very strong book-to-bill and really just the absolute focus of our people on delivering, which is really driving amazing shareholder value. So, with that, I will close and I look forward to talking to a number of you as the day progresses. Thank you very much.

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

Stuart Bradie: Thank you.