KBR Inc (KBR) 2022 Q3 法說會逐字稿

Hello, everyone, and welcome to the KBR, Inc. Third Quarter 2022 Earnings Conference Call. My name is Charlie 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.

Good morning, and welcome to KBR's Third Quarter 2022 Earnings Call. First, I'd like to introduce myself. I'm Jamie DuBray, the new Vice President of Investor Relations for KBR, taking over from Alison, who's moved into a leadership role in our sustainable technology business. I'm excited to be here and for the opportunity to serve you.

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 quarter, 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.

Thank you, Jamie, and welcome to the KBR team, and thank you all for joining us this morning and, of course, in your interest in KBR. Now I would be remiss if I also didn't take the opportunity to thank Alison. She's done a terrific job for us over the last few years, as you will all have experienced and know and she goes on to bigger and better things within KBR. So now on to Slide 4. Now you've seen this slide for several years now. This slide depicts our Zero Harm program, which has 10 pillars across the ESG and sustainability spectrum.

Now these 10 pillars and the underlying behaviors that make up the program and make it very successful are really, really important to our people and are an integral part of our values and, of course, our culture. We have incredible people at KBR. And every year, the amazing work they do in this area is captured in our sustainability report, so which takes us nicely on to Slide 5. This year's report has recently been published and is available on our website. Some key highlights from this year's report are shown on the slide, obviously, not the full report, but just some key highlights. I wouldn't read them all out as a pretty self-explanatory, but the key takeaway is that our commitment to strong ESG performance is unwavering.

And our focus on looking after our people, the environment and communities where we live and work, including on diversity and being a socially responsible company with strong governance is evident. We will do all this while delivering shareholder value through the work that we do, which I think is a clear differentiator. And this leads me nicely on to Slide 6 and the quarter highlights. Now today's presentation, I think, will be relatively quick as Q3 was a clean quarter. And Mark will give you details in a moment. But in short, our revenue growth ex-OAW was solid in double digits with aligned earnings growth.

Execution was once again terrific, resulting in strong margin performance and our free cash conversion was well above 1, so a really, really strong performance. Trailing 12 months' book-to-bill was 1.3 for the whole group with once again STS outpacing. We continued with our balanced capital deployment strategy over and above the quarterly dividend, we closed on the VIMA acquisition. Which is in the U.K., enhancing our capabilities in digital transformation, and we repurchased about $50 million of our shares in the quarter, and that's about $125 million year-to-date.

As you may recall, we over performed in Q1 and raised guidance. We also exceeded in Q2 and again in Q3, both in EPS and cash, and thus, we will be raising guidance again today in both. More on that later. Now on to Slide 7. The market in STS has several tailwinds, important long-term themes that continue to be at the forefront globally. The energy trilemma of energy security, decarbonization and high energy prices and affordability is a reality.

And the outlook is strong, especially with governments like the U.S. introducing legislation that incentivizes the development of more sustainable projects in areas like hydrogen, which I believe you're already aware, we're wholeheartedly involved with companies like Woodside here in the U.S. already.

The market conditions are reflected in the book-to-bill. And I'll just recap book-to-bill in Q1 for STS was 1.3. In Q2 was 3.6%, yes, 3.6%; and in Q3, 1.4, which gives just under 2, 1.9 for the trailing 12 months amazing performance there. And I think it really demonstrates the strength of that market and our position within it. Energy Security was very much the theme in our Q2 earnings presentation and the activity and pipeline in this area continues to be very robust. However, this quarter, we decided to highlight the decarbonization themes and how these are translating into growing demand and backlog for KBR.

Blue ammonia in the U.S., plastics recycling in Korea, green ammonia with associated carbon neutrality in Norway and a move into the technology realm in carbon Catcher. Our work under contract is solid for the year, and our EBITDA and earnings momentum into '23 and beyond is very, very exciting.

Now on to Slide 8. The GS outlook has not changed too much since last quarter. national security, defense modernization, cyber and space superiority prioritization, all areas of focus for KBR, emerging technologies and innovation are key in areas like cyber science, AI, directed energy. And again, KBR is very well positioned, as you're well aware. Budget requests in the U.S. and increased commitments in the U.K. are both positive. And with the backdrop of the ongoing conflict in Ukraine, continuing an additional funding committed to support that mission, all very strong thematics.

Our pipeline remains very, very strong, albeit award timings are actually quite difficult to predict, particularly in the U.S. This is reflected in our overall book-to-bill, which is 1.5% in Q2 and 0.8% in Q3. So you see quite lumpy in terms of timing of awards. I think the trailing 12 months is a much better guide, which stands at 1 across all of GS. The international business continues to perform really, really well, and bookings at Frazer-Nash continue to be strongly aligned with U.K. priorities and budget increases.

The U.S. continuing resolution is not expected to have a material impact to our performance given our bedrock of business and differentiation with our international portfolio. Similar to STS, the focus is on execution and our positioning for '23 and beyond, given the high level of work under contract for this year. We have highlighted some key wins in the quarter, which again reflect the market outlook comments and demonstrates, I believe, the enhanced capabilities and the agility required to be successful today.

A new sizable win under the IAC-MAC to digitize and modernize analog systems with a modular open system architecture solution for vertical lift aircraft. I'm particularly excited about this win as it was hotly competed under the IAC-MAC structure and KBR excelled on technical differentiation. Additional highlights this quarter include a cyber digitalization win in the U.K. as prime. The new space suit went to return to the moon with Axiom. We are a key technology and capability team member and selection of our Xandar JV as 1 of 5 who now have a hunting license across R&D of hardware, systems and software to enable scientific and technical intelligence for the National Air and Space Intelligence Center.

Absolutely incredible programs, all exciting and very much aligned with the thematic of we do things that matter. And this really, really resonates with our people at KBR. I will now hand over to Mark, who will take you through the numbers in more detail and of course, the guidance. Mark?

Great. Thank you, Stuart. Thanks also, and welcome to Jamie. She's already off to a great start and a special thanks to Alison. And as Stuart said, for a job really well done. And I think you all know that. So really pleased with this transition. I'll pick up on Slide 10 for the Q3 financial performance. As Stuart said, this was a clean quarter with performance tracking really well.

Just stepping back, I think it's important to highlight that despite global instability, war in Europe, high inflation, foreign exchange headwinds and rising interest rates, KBR delivered outstanding results across all parts of the business. We have an incredibly resilient long-term portfolio enhanced by attractive contract vehicles, technologies and solutions that afford near, mid- and long-term growth opportunities underpinned by the important long-term thematics that Stuart mentioned just a moment ago.

So on to the numbers. Revenues were up 11% over Q3 last year on an ex-OAW basis, reflecting organic growth in both segments and the new contribution from Fraser-Nash and VIMA, our recent acquisitions. Margins were really strong on excellent execution and favorable mix, and I'll cover more of that on the next slide G&A and nonoperating items were well in check, which is notable given the market conditions and foreign exchange and interest rates. Specifically, we overcame about $6 million in P&L headwind in the Government segment from the strengthening of the dollar against British pounds and the Aussie dollar.

It's also important to note that while our STS business benefits from a diversified global footprint, it generates roughly 85% of its revenue in U.S. dollars, significantly reducing FX volatility in that segment. As for interest, we did uptick expense this quarter by $3 million, but this was contained by low debt levels, below leverage ratio of 2.0 and with roughly 70% of our debt at 70% of our debt being at fixed rates. More on this in a moment as well. This all contributed to a healthy adjusted EPS of $0.65, up 12% on an ex-OAW basis.

Operating cash flow for Q3 was terrific at about $120 million with year-to-date totaling $336 million, representing an of cash flow conversion of over 115%. Together with the favorable Ichthys settlement and asset sale proceeds earlier this year, year-to-date deployable free cash flow totals more than $0.5 billion, enabling M&A, debt reduction and increased buybacks. And finally, I'd like to reemphasize comments we made last quarter. With significant new joint venture activity, revenues are becoming less indicative of the economic progression of KBR.

From a business portfolio and financial perspective, we are focused on profit growth, strong cash flow conversion, lowering our cost of capital and achieving strong predictability. On to segment details on Slide 11. Starting with STS, top line growth was an excellent 16% all organic, with even better earnings growth of over 60%, 6-0 on heavy mix of license activity across the intellectual property portfolio and growing contributions from equity and earnings. EBITDA was 20% of revenues, well ahead of our target in the mid-teens. As the licensing mix can change quarter-to-quarter, I would reiterate our STS margin target remains mid-teens, with expected annual improvement of 1 to 2 percentage points per year.

However, and as suggested in our last call, the market conditions are robust vis-a-vis our offerings and our IP, and we are tracking ahead of our $300 million targeted EBITDA by 2025. This diversified low-risk, unique global business is proving out its growth plan is showing resiliency and adaptability, excellent profitability and continues to consume no working capital. There are not many businesses out there that deliver these attributes. Government continues to be steady. While appropriations for government spending are strong in all of our markets, we are seeing some outlays drag, particularly in the U.S. Certainly, part of this is due to focus on supporting Ukraine.

And we're very proud of our own efforts to assist the U.S. European Command on this mission under LOGCAP V. Margins were good at 10% for the Government segment, reflecting upmarket offerings and ongoing strong program performance. Again, foreign exchange did impact reported revenue and profit levels here in this segment, but did not impact margins.

On to Slide 12. As Stuart mentioned earlier, strong cash flow is driving capital deployment options, and we continue to believe a balanced approach and deployment is most prudent. We used over $70 million for the acquisition of VIMA returned almost $70 million of cash to shareholders via buybacks and dividends, and our leverage ratio did not change from last quarter. While not shown here, we bumped up our interest rate swaps to protect against rising rates. Our fixed to float ratio is now circa 70% fixed, with much of that achieved through proactive and now quite valuable interest rate swap agreements. These agreements endure through 2027 and keep our fixed borrowings at a very attractive rate of under 3%. I think that deserves a real shout out to our treasury team once again.

We increased stock repurchases to $50 million in Q3. And with that, our Board approved an increase to our buyback authorization to $500 million, representing 7% to 8% of our market cap. Finally, on to guidance. Slide 13. We're ahead of pace through Q3 with strong overall business visibility into Q4. We are narrowing our top line range for revenue to $6.5 billion to $6.7 billion for the year. We're upping and narrowing our adjusted EPS guidance to $2.60 to $2.65 and reducing the expected tax rate range by 1% with R&D tax credits expected in the fourth quarter.

The increase in our EPS guide is the result of strong year-to-date operational performance, plus the expected R&D credits, which together more than offset headwinds from FX and interest. Lastly, we're increasing and narrowing the adjusted operating cash flow guidance to $375 million to $400 million. with margins being unchanged. So thank you. I'll turn it back to Stuart for closing remarks.

Thank you, Mark, and on to our final slide of today, Slide 14. I think we can all say that KBR remains very well positioned, opposite for long-term thematics that really favor our solutions and our technologies. Our STS business has exciting near, medium and long-term market tailwinds. It has increasing backlog, margin and EBITDA and its proportion of earnings just over 1/3 this quarter in overall KBR continues to increase, given performance and outpace growth.

Our government business is very well positioned in attractive areas of increased focus and funding and a substantial long-term and predictable backlog and clear differentiation with our international portfolio. End market momentum in areas of global importance that's doing things that matter is reflected in our strong pipeline. We have and we will continue to demonstrate discipline and balance around capital deployment, strategically enhancing our portfolio and also recognizing value in our current trading price.

Our 2025 targets remain intact regardless of world and market volatility and interest rate increases and FX. And our strong balance sheet helps as does the multiyear visibility of our backlog, a very clear differentiator for KBR. Our execution has been exemplary. And for this, I would like to thank our amazing people. And this, combined with our market outlook has allowed us once again to increase our full year guidance. Thank you, and I'll now hand it back to the operator, who will open the call for questions.

(Operator Instructions) Our first question comes from Bert Subin of Stifel.

Congrats on the quarter. I guess for my first question, your guidance implies earnings decline quarter-over-quarter in the fourth quarter. Despite Stuart, what I would say, through your prepared remarks, sound like pretty solid tailwinds at year-end. Can you guys just walk us through what -- why that's the expectation?

I mean it's pretty standard. If you look back in our, I guess, our history, I mean, Q4 through these seasonality. You've got Thanksgiving. You've got Christmas. You've got sort of factors coming in. And that's it, that's the main driver there. There's nothing sinister. There's nothing bad about the business about it. But as you rightly point out, the tailwinds are strong, but it's just seasonal.

Of course, people are asking you had a huge slug of OAW, Bert, right? So I assume you're well aware of that. So that is, of course, is not here this year. That's a major delta year-over-year in the raw numbers.

Yes, Mark, I guess I was talking on the quarter-over-quarter looking 3Q to 4Q. I didn't know if there was an FX headwind that's assumed in there as some of your hedges roll off or if that's just typical seasonality?

Is just seasonality. And I think the business has outperformed considerably to head off, I guess, quite reasonably sized FX and interest rate headwinds. I think in our guide, there's probably $15 million to $20 million for the full year. So we've managed the business. Performance is nice to overcome all headwinds and outperform. So it really has been an amazing performance.

Okay. That makes sense. And just as my follow-up, can you guys provide any update on HomeSafe? I know the expectation was for an October decision. Do you think that time line is extending? Or should we hear something in the next few days? And then just in the meantime, have you started working towards the potential transition despite the fact that there's still uncertainty there?

Yes. So I mean, we -- there is an expectation. As you know, the state runs out at the end of October, and the expectation is that we'll hear something hopefully this week, but I can't guarantee the court process and the timing of that, but that's the expectation for that. And I think the customer feels the same. So we'll hopefully hear something in the next few days. And when we do, you'll obviously get to know that quite quickly.

And in terms of getting ready, I think we've said before about the delay in this in terms of going through this protest period, has really allowed us to do a lot of the backbone development work and set up the systems and get the resources in place to derisk the transition, but there still is a 9-month transition period once they award. So again, it's not going to be hugely material as we go into next year. It will be obviously some at the end of that 9-month period in terms of the moves, but the peak is in the summer. So there will be a few hundred million, I guess. I don't know, we'll have to clarify that just on timing.

But I mean, obviously, the ramp-up comes as we go into '24. So very much supports our long-term growth aspirations and it's a terrific win, assuming it all come through positively in the next few days.

Stuart, just a clarification question on that. If we were to find out this week that a favorable decision came in, then you think it would be sort of the 9-month clock starts at that date?

I think that's right. I think they'll be keen just to sit down and kick off a week after or a few days after whatever and start to plan that through. And they're aware obviously that we've been, I guess, working a bit towards that. And we've made advances on some of the key risk areas. So I think very keen to understand that. So I think absolutely, that should be the right timing.

Our next question comes from Jamie Cook of Credit Suisse.

Nice quarter and 2 questions. One, just following up on the HomeSafe Award. And I guess it's an unfair question, Stuart, but more about 2023. It looks like, it would just run rate your second half earnings in 2022, your base of earnings for 2023 is $260 million. HomeSafe doesn't kick in until later in the year. I guess we have a positive from Plaquemines kicking in more, but I'm just trying to calibrate that with where the Street is. I think 304, 305 for next year, if we're missing something there, because that seems like a pretty significant ramp.

And then I guess my second question is on the M&A front. I know last quarter, you guys made a comment about being opportunistic, with potentially larger deals, keeping dry powder. So just trying to understand if there's any new news on that front and sort of how the acquisition pipeline is looking?

Okay. Maybe I'll do the second one, and Mark can maybe do the first one. I think not much change from last quarter, Jamie, on the M&A front, on the activity. I mean there's still quite a bit coming into view, if you like, but I don't think the multiples have come down really quite quickly as you would have expected. It does take a bit of time. And the capital markets are still not terrific.

And so I think for us, we will run into probably the end of the year with exactly the same philosophy as we described last quarter. And I don't -- I mean, you never know, but I don't think that will change over the next few months. And -- but as we come into New Year, I think the opportunities, we'll certainly be looking very carefully at them. So yes, so really no change there.

Jamie, Mark here. While everything I'm about to say is subject to what the court says, hopefully this week, the client has been very clear that should we prevail and move forward that we will not participate in the busy season of the moves in '23, and we will really start moves towards the end year.

And so with that, we're that would not be much activity in '23. So it could be that the Street numbers that you referenced are assuming more. And so we think we should be cautious there because of what the client has said and the ramp-up involved there. But we'll know more once we get the court decision and what the client then says after that, which could always change, but that's think all of that warrants that should we prevail, we'll start to see some activity in Q4 next year but not sooner.

Okay. And then just a follow-up. You didn't answer on Plaquemines. I know like the Margins in STS is starting to improve. I don't know how to think about the run rate or how much that helps 2023? Or any commentary on just Plaquemines contribution?

Well, I mean I don't think we're going to talk specifically about one project and its contribution, Jamie. I think the STS performance, it's outpacing. I think you've seen that. I think the -- obviously, it's growing sequentially quarter-on-quarter. The book-to-bill will support that continued growth.

We've said publicly that we expect it to double EBITDA to about $300 million by 2025. We're ahead of pace to do that. And obviously, a little more on that in terms of guide when we come out next year in Q4. So I mean, the -- we're very, very upbeat about the positive momentum in that business and the performance that we're seeing and our ability to actually attract great talent into the business with the work that we're doing.

And this whole sort of -- we spent quite a bit of time to explain the market over the decarbonization and the focus on hydrogen in the future and things like that, the work that we're winning. And that's a real talent magnet as well.

So I think it all bears well going into '23. And other than perhaps people have over some of their HomeSafe assumptions, I think my -- maybe the under-egging STS assumptions, I don't know. But certainly, I think we're feeling pretty strong about the business performance in that area.

Our next question comes from Tobey Sommer of Truist Securities.

I was hoping you could speak to the growth outlook for your space portfolio across civil, defense and intelligence, and maybe juxtapose that with the growth outlook for the federal unit as a whole?

Okay. So I think the growth outlook in commercial space, Tobey, is, for us, that's still quite a modest part of our business. It's not really material. It is growing, but it's probably not going to move the needle as we move into next year.

I think in terms of military space, which is really up going into next year, I think there's a lot of excitement about our positioning there and the funding that's flowing into that arena. And certainly, our NTG business is very well positioned to take advantage of that. And certainly, we are expecting pretty strong growth in that arena, double digit into next year.

In terms of the -- what's happening in the civil side, the NASA side, obviously, the budgets are up. The timing of award has been slow, as you're well aware. And so I think, as we look into next year, we'll have some modest growth there, probably in the single digits is really our expectation. But of course, that can change on a dime if some of these awards come through on a timing basis.

So I think, again, that's an early indication, but we'll be able to give you more color, I suspect, when we talk about full year '23 when we meet with year-end earnings in end of the Q1 really next February, so next year. So that's kind of where we sit. Does that makes sense?

It does. From an overall size perspective, how big is it as a percent of either federal or the total company?

I mean -- yes, it's about $1 billion.

Billing, as a science and space business unit, we, of course, do quite a bit of mill space in defense and intelligence. So together, it's a pretty big chunk of the Fed's business or GS overall. And we said the growth prospects there, mill space in particular. And [MTG/ Space Star] contribution there is only increasing, really exciting and kind of massive space, of course, is -- we'll compare with -- how the procurements come out, but we've done well with the team there. We've got some -- we compete head of us. We're very confident on those.

Yes. So I think if you combine all 3 areas, plus a little bit, maybe we do outside the U.S. is probably $1.3 billion to $1.5 billion and that's good, Tobey.

And you've talked about how revenue growth, because of the emergence and importance of joint ventures, isn't quite as an important metric going forward to measure your success. I was wondering if you could share with us any changes in incentive compensation, either that have been made or that you contemplate in order to drive the behaviors of this new kind of business mix?

Yes. So I mean, in terms of our short-term incentives, they're all driven by profitability and cash and sustainability. And so they are completely aligned to driving earnings and driving associated cash flow.

That's been the case for some time.

I mean we said when we redefined KBR that the focus would be on quality of earnings and delivering cash as a contributor, which is a true measure, I think, of profitability. And we've been very focused on that.

Tobey, it's just that, as Mark -- and that hasn't changed for several years. I think really to comment on performance coming through the EBITDA line is just because of the way you account for job ventures. It doesn't really change the way that we look at where we work or compensating our people. We've always been driving to bottom line growth.

Our next question comes from Steven Fisher of UBS.

So the 8% organic growth, I'm trying to contextualize that. So how did that compare to your expectations going into the quarter? And what organic growth assumption do you have embedded in your Q4 guidance? And I guess the bigger picture here is how relevant is that organic growth concept going to be for 2023?

And given what you've just been talking about in terms of the change in equity income and focus on EBITDA, is there going to be an organic EBITDA growth metric we should be thinking about for next year?

I think we have given as part of our long range guide, Steve, the growth in that area. Overall, I think of 6% to 9% at the low company level.

Yes, don't ask for that HomeSafe obviously. So we've already given that guide now. We'll have to look at that, obviously, in the context of the acceleration a bit of STS. And we're doing an Investor Day, obviously, at the end of Q1. And we'll be testing some of these things off to reflect current market conditions and current performance, frankly.

And -- but ultimately, right now, the number is, as you know, the 6% to 9% CAGR across that EBITDA EPS line. And so again, I think over the 2025 very tight end. So I think everything is in line.

And that's -- what have you embedded in Q4 something similar?

Yes. I mean I think we said that seasonality, Q4 comes off a little bit because of what we've discussed earlier in the call.

Okay. And then just more focusing on the government segment. You talked about some of the outlays dragging in the U.S. My understanding is that they've maybe overall picked up a little bit. So I'm curious if that's going to start flowing into the Government segment at some point.

And as you think about 2023, how good a sense do you have on whether all 4 of your segments within Government should be growing organically next year? And what are some of the kind of determining factors there?

Yes, I mean, I think what we tried to demonstrate this quarter and looking back on our book-to-bill in the previous quarter, Steve, was exactly that. There's a bit of lumpiness and things like that that's come through.

I think, overall, we're very pleased with the quality of the pipeline. And the expectation is that, that would start to flow through over the course of the next couple of quarters. In terms of the outlook across the various segments, I think we're very clear that GSI continues to perform really, really well, has strong backlog, terrific margins and is going great guns. So no real issues there at all. And hopefully, people recognize that as a clear sort of difference with KBR.

In terms of the others, I think I've already touched on space and I think -- and I've also touched on, I guess, the intelligence side of space to military space as well and our growth there. I think we're seeing in our systems engineering business, which does things like IAC-MAC and these recurring quick-to-procure type contract vehicles, because that's going really, really strongly. It has, and we've actually reported that quarter-on-quarter for many quarters.

And I think that momentum continues in those arenas and the themes around defense modernization and some of the digital solutions they're looking at is absolutely clear, and we highlighted that again in some of the awards we picked to showcase this quarter.

So it really brings us to really the readiness and sustainment business. And of course, our expectation is that the mission, particularly EUCOM, will be more enduring certainly into next year. That's the visibility we have today. And obviously, with the addition of HomeSafe, I think that segment changes quite considerably.

So we're feeling pretty good about each of those segments. And the pace of growth on revenues and sustainment will be driven, I think, by HomeSafe. And we'll obviously hopefully know more about that later this week, and we'll be able to come to market pricing and explain that a bit more fulsomely.

(Operator Instructions) Our next question comes from Andy Kaplowitz of Citigroup.

Stuart, maybe you can give us a little more color into what you're seeing in the U.K. Obviously, you recently increased your exposure there. Last year, Frazer-Nash, this year, VIMA. How are those acquisitions doing? And do you expect to see any impact from a slowing U.K. on your businesses?

So we announced last quarter -- and good questions. And that really we've added some executive weight to our team by bringing Paul Kahn, a very seasoned executive in that arena. And we're driving integration of particularly VIMA and harmonic into Frazer-Nash. And that will be a very strong brand for us in the U.K. It's very well recognized.

And I think the level of funding that the U.K. government are committing as are the Australian government into defense is increasing. And of course, we've got the complexity in the U.K. Brexit as well. And obviously, we've got war on our doorstep in Ukraine.

So it's a very interesting time in the U.K. and we've got a bit of a revolving door at #10 Downing Street as well. And hopefully, that has solved, at least, for the next few months. So I think a little bit stability with the political scene. I think the commitment around defense is clear from the conservative government. And as a consequence, those businesses are going really, really well.

Our work in defense digital is going extremely well. We're doing -- we're digitalizing the Navy at the moment, and we expect that to move into other arms of the military because we're at the forefront of the digital transformation programmatic skill set.

And then secondly, I think just the work in government, in general, is flowing into Frazer-Nash at a quite a clip. And I'm very pleased to announce that they are actually growing. I mean, in that type of business, I mean, one of the asset test is just people growth, and their people growth numbers are up significantly, so well in the double digits.

So I think that those businesses are going terrifically well. And I think we're very much aligned with our values. So the cultural alignment was really strong. They really feel that they do things that matter also. And yes, I think absolutely, it could be more for you, Andy. Great people.

And then maybe kind of a similar question around STS in the sense that obviously, slowing global economy, you've had very strong book-to-bill there. I think you said 1.9 this year. You do have still some energy exposure. I don't know if I call it legacy anymore, but -- so it's a much different business than it used to be. Could you still see or is your expectation still the specific positive book-to-bill in STS as you go into '23 even if the global economy continues to slow?

Yes, I think so. I think the -- as I said, we've got this Agency Trilemma. And I can't see that changing in terms of the drivers in those markets. I mean energy security is right at the top of the list for obvious reasons.

And some -- the people have been talking about blackouts in certain parts of Europe and things like that. it's pretty scary stuff. And so the diversification of supply is right at the top of the agenda. And then you've got the whole climate change agenda and you've got the fact that the segment has been underinvested in for a couple of years. So the supply/demand piece, and obviously with the reductions coming out of Russia, et cetera, are obvious.

And so I think you've got -- and then -- and if you think about the next piece of that is that you've got, I guess, oil companies and national companies and chemical companies that have got quite a lot of resource and financial capacity given recent pricing. And they've got commitments around a hydrogen economy into the future and decarbonizing there the way that they produce energy.

And so you've got all these factors at play that are hugely aligned with our technology and our high-end solutions and our technical capability. And so I really think it's -- I cannot see that slowing down, and I think we're very well positioned. And certainly, our book-to-bill would reflect that. That's all just say, the proof of the point but how many books you have with regards how people talk about the outlook. And I think that is reflected in our performance, and I think it's reflected in our bookings.

Our next question comes from Michael Dudas of Vertical Research Partners.

First, Mark or Stuart, can you remind us of any recompetes that are left for this fiscal year and as you're looking out to 2023?

None for this year. I think we're all behind us. And into next year, I think the -- I think we've got one of our big massive ones, IMO, but that will actually be the time that procurement processes on it will be into '24. I think we compete next year, quite low.

Yes, we have some activity to get out the door in terms of proposals and all of that, but the actual risk really falls into the following year. So really quite a bit of book-to-bill cover for '23 already, and then we'll continue to grow until we start the year. So we'll have the guide in '23 that really is well backstopped by work under contract.

And following up, Mark, you talked -- through the call, you guys have talked about M&A pipeline a bit does let anything happen in near term, and you've done a great job on hedging some of the debt with some pretty attractive rates in the current environment.

So as we look towards free cash allocation in the next few quarters is I know it's balanced, but you anticipate continuing to outtake capital to share repurchases?

Yes. Stuart mentioned earlier that we think the price represents a very good value on the buy side right now, and we demonstrated that with $50 million of buybacks in the quarter. So that's an uptick from historical levels, and you saw the increase in authorization as well.

So our Board is very supportive of this as well. We'll look at our dividend as we always would do at the beginning of the year, and we'll talk about that in February. But we, of course, have a strategy to pay an attractive dividend. So we'll pay good attention to that.

And then I would just -- going back to the last call, say that in light of the interest rate environment, and there's more cards to be dealt with there. And despite the success we've had in hedging our exposure there, we still -- all things being equal, I prefer to be cautious with capital at this time and see that shake out. And that would really portend to the M&A area.

So we've always been very selective. We'll be very, very selective in this market given the valuation comments to it made earlier as well as the unknown interest rate direction.

Our next question comes from Sean Eastman of KeyBanc Capital Markets.

And Alison definitely deserves a shout out here. Thanks so much for all the help and time over the past number of years. I wanted to come back to the GS revenue discussion. I just want to try to flesh out what the big swing factors are around where the revenue run rate goes from here over the next, say, 12 to 18 months.

It seems to me like perhaps the NASA piece of the business is one of the bigger swings. Correct me if I'm wrong there. But maybe just update us on what's in the near-term pipeline there? What we should be tracking? And just how to think about the swings around the revenue run rate and the bookings momentum in GS over the next couple of quarters?

Do want to go with that, Mark?

Sean. First, I'd say, NASA/ Space Place is -- while the procurements are pretty chunky, that's a pretty steady state business. I expect to see modest growth there, not a lot of volatility in what we see there.

And that's -- if you look at the past, that's been pretty consistent with our trending. D&I, which has more IDIQ vehicles, is the beneficiary when there's lag in outlays. And we got money appropriated they need to spend, and we're starting to see more green shoots there towards the end of September and October. So we feel pretty good about pace of spend in that area, particularly vis-a-vis things happening in the world, military-wise and the need for capability.

And so that team was able to deliver there in mill space and in systems integration and so forth. So I think that one has opportunity in that light. Readiness and sustainment is -- has always been subject to world conditions. But as Stuart said earlier, we see a pretty stable situation in EUCOM as a result of what's happening there.

I think a great story is GSI because they have gone through a transition to upmarket offerings to consulting and advisory. As Stuart said, Frazer-Nash and VIMA Harmonic going really well, integrating of the team, and that's all substantially better margins than past history as well as the overall GS profile.

So the quality of where we're seeing growth, particularly D&I and GSI, relative to margins, is very helpful in the world we're in here. And so excited to have a contract position and the momentum and the ability to add people, as Stuart said earlier, on the international front, which has been a big success in recent months.

Okay. And then one of the elements around STS that I don't think I heard an update on this quarter is Mura. And I think Dow was out earlier this month, accelerating their sustainability goals, the agreement with Mura as part of that. So just any color on how to think about how that opportunity set filters into the STS segment over the next couple of years would be great.

Yes. I mean, honestly, it's a terrific piece of business, Sean. We announced the GS Caltex deal and just recently and last week, and that's another plastic recycling in Korea, and the momentum around this is terrific.

I think Dow have now exercised their option to take equity in Mura itself. So they now own 6% of Mura, I think, something around that number as well as obviously their commitment to offtake. So I think, ultimately, it's not just KBR. You've got some pretty serious players putting a lot of -- putting a lot of calories as we say, into making this a success.

And -- I mean I think it's going to be really, really positive to KBR story as we move into next year. I think if you just think where we are in the cycle, we are selling licenses today. And the level of uptick in revenue and return to KBR as we go into more engineering and Axiom execution around modularization and proprietary equipment, and then actually supporting the ongoing work, they're probably through TLIS, the Technology-led Industrial Solutions business.

I must say I know that you guys think about TLIS quite strongly, given its enduring nature of the sort of contracts that wins in TLIS on its own this quarter had a book-to-bill well in excess of 2. So really, really strong. We don't normally call that out, but it's the enduring part of that business. And obviously, it's going great guns as well.

So I think Mura is a huge part of us. And I think as these developments mature into execution, you'll certainly see the revenue uptick and return uptick to KBR. So more to come, but very exciting.

Our next question comes from Jerry Revich of Goldman Sachs.

I'm wondering if you can expand the discussion on Heritage Tech. And as I look at Slide 7, you folks have had really a number of orders: green ammonia, carbon capture technology. As we look at for the legacy Heritage Tech business today, can you talk about what proportion of the bookings coming in are for green technology like plastic recycling and these other areas? Because it feels like they're a disproportionate portion of the bookings that we've seen over the past year.

Yes, there's certainly more emphasis on the green technology portfolio. That's for sure. And I think, over time, we talk about ammonia about -- it's really around hydrogen and I think everyone understands that. And -- we're also -- we've not really talked too much about this, but we're actually doing stand-alone hydrogen developments in the U.S., for example, or so.

And so -- and certainly, the new IRA bill to development is far more profitable in terms of rates of return for the order. So I suspect more of them to come. So I think you're going to see an increasing amount of sales that are green from that portfolio as we move forward, Jerry.

But ultimately, there's still an energy security challenge. And so there's still investments in what I call more traditional solutions. And our olefins business is doing very well, and our petrochemical licensing is also doing well. So they all come with the green aspects in terms of decarbonization and efficiency and lower energy use, et cetera.

So the thematic all holds, but ultimately, we're seeing a portfolio selling very, very well rather than just 1 or 2 technologies that's across the range, which I think actually is terrific because you can never predict timing of these awards.

And so the more irons you have in the fire, probably the more predictable the growth is, and that's what we're seeing. So -- but I do agree with you. I do think that as we progress over time, certainly, the hydrogen aligned technologies are going to be -- and the circular economy technologies are going to be very much at the top of the pack.

And when you look at the bookings that you've had just for Heritage Tech within past year, just qualitatively, it feels like you've been running north of 1.5 book-to-bill in that subsegment. Can you talk about whether we see a big ramp-up in project execution and revenue burn over the course of '23? What's the duration on these awards?

I mean I think, as you know, the awards in that arena are actually quite fast paced. And typically everything goes to there's a lot rise on Q4, obviously, as people try to realign budgets and spend money and things, Q4 is usually quite an active period for that part of the business.

But we look at STS as an overall business rather than just a heritage tech or energy security or whatever. It's like -- it's an overall offering that delivers, I think, huge value to customers across that value chain. And so that's the way we look at it. That's the way we talk to the market about it. We talk about the overall growth in margins and the book-to-bill across that business.

So we are seeing more activity in the green arena, no doubt about it, and we're very well positioned. And we actually realigned the whole of our historical business opposite that market a couple of years ago, and I think that's paying dividends today.

Super. And lastly, Stuart, on that note in terms of long-term targets, I think you're at 19% margins for the Sustainable Tech segment, you're at 20% this quarter. How sustainable is that 20% near term, you called out a number of items? I wonder if you could just expand on what's the run rate as we stand today about any lumpy items?

Yes, I think -- Yes. So the run rate is -- it's a bit above pace. So I think, last year, I think when you took out some -- I think when you took out some of the one-offs and things, we were running at lower teens sort of 13%, 14% last year.

And we said we'd grow the margin 1% to 2% per annum. And I think we're at the upper teens in terms of when we look at it blended over the year. So I think that, as Mark said, 20% that we delivered this quarter is due to a healthy licensing mix. But when you actually put that across the whole year, we're ahead of pace, but we won't be at 20%, and that's for sure. I think we'll be in the upper teens that level.

But again, that's a hugely positive statement. I mean we've got to put it in context. It's a terrific performance.

We talked about hitting that in the next 3 or 4 years when we issued targets and we're there now. So we've seen acceleration from great mix, great markets. other projects kicking in as well. So we're ahead of the game, as we said all along, and that's why we made the comments on the $300 million EBITDA being achievable at a faster pace as well.

Our next question comes from Gautam Khanna of Cowen. Gautam?

This is Spencer Breitzke on for Gautam. Could you provide any sort of commentary or quantification around European Command sales in 2022 and maybe 2023?

Yes. I mean, I think we're probably around about $65 to $75 a quarter, I mean it ebbs and flows a little bit, but it's pretty constant around that, and we expect that to continue into next year.

Our next question comes from Jean Ramirez of D.A. Davidson.

This is John Ramirez for Brent Thielman at D.A. Davidson.Yes. I want to start, if you give some color in whether we should anticipate a continued ramp-up in activity related to LOGCAP in Europe in the second half? Or is that plateauing?

I think we -- I mean we just -- I guess we just covered that. I think it's stable at the moment between 65% and 75%. And I think the that's probably the visibility we can give you at this juncture as we move into next year.

In some quarters, that does uptick depending on, I guess, mission demand, et cetera, but that's probably a good way to think about it and model it at the moment. And hopefully, as we get into the end of the year, and we understand what's happening in terms of commitments and things into next year, we'll be able to update that number in our -- in February earnings.

And could you provide more color on the government solutions? Are you able to comment on work under contract for 2023?

Not yet. I mean I think we are in a unique position, John, in that we do have a substantial amount of work under contract and not just for '23, but through '25 and beyond, And we've been very clear about that. But assuming that we keep our -- when we compete, which are not high, high numbers, I mean, and at a normal rate, then we've probably got at 60 -- 70%, Alison 70% of our work under contract today to achieve our overall '25 targets.

And so obviously, that goes up the closer we get to '25 as we win new work. So we've not set the guidance for '23 yet, so it's difficult to tell you work under contract levels. But we'll be going in with, obviously, quite a substantial amount of within the contract given what I've just said in terms of the long-term bedrock of business. But also the book-to-bill and STS really helps as well.

So I think we'll be going in giving guidance in February with a strong underlying work under contract. And that -- but I don't know what the number is yet.

At this time, we have no further questions. So I'll hand back over to Stuart Bradie for any closing remarks.

Thank you very much, Charlie. Again, thank you very much for taking the time and your interest in KBR and for all your questions.

I would like to just reiterate, I saw some of the early reports coming out that our increasing guidance was attributable only to tax, and that couldn't be further from the truth. We tried to lay out in this call that we've had $15 million into $20 million of headwind with FX and interest and we've outpaced, from an operational performance perspective, to offset that and more.

So in these volatile times, I think the resiliency of our business is currently being shown through in the reflection of the numbers. It's not just a finger in the air. We're actually delivering it. And I think the markets we're in are robust. I think the performance of our people is exemplary, and I couldn't be prouder of them. That was just absolutely terrific.

So thank you again for your time, and we look forward to follow-up calls and talking to you all soon. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may disconnect your lines.