KBR - Q4 2023

Transcript

Operator (participant)

Good morning. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 and FY 2023 KBR, Inc. earnings conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand over to Jamie DuBray, Vice President of Investor Relations. Please go ahead when you are ready.

Jamie DuBray (VP of Investor Relations)

Thank you. Good morning and welcome to KBR's fourth quarter and 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 quarter and then open the call for your questions. Today's earnings presentation is available on the Investor section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance, as outlined on slide two. These matters involve risks and uncertainties that could cause 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 (Chair, President, and CEO)

Thanks, Jamie, and a warm welcome to a 2023 year-end earnings presentation. I will start on slide five. As we reflect on 2023, I wanted to begin today with a theme of looking after our people. Creating an environment where each and every person can go home after work at a minimum the same as when they started their day was very personal to myself and the whole leadership of KBR. A zero-harm program is only as good as our processes and, of course, our people being committed to our values every single day. I'm therefore pleased to report that once again we achieved top quintile results, an outstanding achievement given what we do and where we do it. A huge shout-out to KBR's people all across the world.

There are a number of achievements and milestones that we have celebrated through the year as examples of this exemplary performance on the slide. I won't read them as there are many others, but this gives us a good feel for the global and complex nature of what we do and why we are so proud of our HSSE performance and ongoing commitment to continual improvement. Onto slide six and business health. I will focus my remarks on the full-year performance and outlook. I'll also give you an update on HomeSafe. Mark will cover the quarter results, which were once again resilient. We met or exceeded expectation on all key metrics. Mark will also break down the year a bit more and present, of course, on 2024 guidance. On the people front, we increased our headcount by double digits, which is aligned with our organic growth.

Pleasingly, through the year, our attrition reduced, and through independently run surveys, I'm proud to report that KBR is now certified as a great place to work in 16 countries. This is a direct result of the emphasis we place on valuing our people. We are, of course, not perfect, and we will in 2024 and beyond 2024 strive for continual improvement and deliver even greater investment in our people. But I think it's important we must also recognize the 2023 performance. Talking of recognition, you can see some of the awards we received during the year. And importantly, these were all assessed independently. On zero-harm, we've already covered the safety stats. From our people survey, you can see that our people truly believe that we are committed and do care for them and about them.

As you're aware, our unique ESG position allows us to deliver shareholder value in addition to fulfilling our ESG goals. These align with UN Sustainable Development Goal Seven, which is affordable and clean energy. As you'll see on the slide, we've listed an example from each of the businesses. In GS U.S., we support the FAA VALE project designed to achieve cleaner emissions from airport ground support equipment. In GS International, we support the U.K. MOD with testing of zero-emission military aircraft. As you know, in STS, we have many sustainable clean energy technologies, which help some of the largest organizations in the world deliver cleaner environmental outcomes. Moving on to business growth. Now, these are the metrics around work winning. Overall, trailing 12-month book-to-bill was 1.1x. As you would expect, with this result, backlog was up 10% year-on-year to $21.7 billion, including options.

This provides great visibility of future earnings potential and, importantly, excludes HomeSafe. There are more positive news on that in a moment. In terms of 2024, this translates to 75% of work under contract as we start the year. Given in a typical year, we also execute 15%-20% of our revenue on smaller short-term consulting contracts, plus, of course, ongoing contract growth. This is a very solid basis for the year ahead. Onto group financials. Strong organic growth at 11% ex-OAW, a fantastic performance in its own right. But more impressive was the associated Adjusted EBITDA result. We delivered 12% year-on-year Adjusted EBITDA growth by increasing margins to 10.7%, an outstanding result. Onto cash. We settled the convert and warrants in cash, as promised, not only avoiding dilution but reducing our share count, truly delivering on our commitment to maximize shareholder return.

This was all possible due to excellent cash management and strong treasury and tax management, with adjusted OCF conversion at 117% for the year. Absolutely outstanding. So in short, we met or exceeded expectation across all key metrics for the full year: revenue growth, adjusted EBITDA, adjusted EPS, and, of course, cash. Our book of business underpins our continued momentum and growth. Our vision is to deliver technology and increasingly higher-end, technically differentiated services in attractive end markets that matter: safe, secure, and sustainable. We continue to realize our vision, continually moving away from markets and business models that become commoditized, growing our technology portfolio both in GS and STS, and ensuring we operate more in the differentiated services market. This, of course, should result in enhanced margins over time, which was clearly the case in 2023.

All of this was achieved in quite a volatile year, not only geopolitically but also fiscally, especially with increased interest rates. Onto slide seven. I'm not going to spend too much time on these slides as the markets we discussed last quarter and, in fact, most of 2023 remain unchanged. You can see three awards on the left demonstrating how engaged KBR is across sustainability in all aspects of the Energy Trilemma. STS book-to-bill on a trailing 12-month basis was 1.1 times. And excluding the large LNG project, which, of course, has a large burn, the trailing 12-month book-to-bill was 1.2 times. I think a really strong indicator that STS, both in technology and sustainable services, continues to grow and win work in critical areas aligned with our vision. The margin performance demonstrates this, which Mark will cover in a moment.

As a reminder, we have a number of inbound requests to do a deeper dive on STS. Why has it grown Adjusted EBITDA 50% year-over-year? What is the book of business, and how does it work off to demonstrate the non-cyclical long business attributes? How do we make our returns, and what are the key markets going forward and their outlook? Our intent is to present a focused, I guess what we're calling an STS primer, the week of March 11th, to answer these questions. The objective is to increase investors' knowledge of this business before we go into an investor day, at which our focus will be very much on future direction, increased synergy, and the potentials going forward. On the government side, in a year of volatility, both internationally and domestically, the team did an amazing job. GS book-to-bill on a trailing 12-month basis was 1.2x.

We have highlighted some example wins that again show the realization of our vision. Firstly, in technology, directed energy via DE M-SHORAD. High-end consulting via Frazer-Nash working with the U.K. government, showing very strong synergy with STS. And thirdly, absolutely great performance via highly differentiated services leading to extended scope on the Preservation of the Force and Family contract. KBR is very well positioned in key markets that, post-appropriation, we expect will be well funded. Now onto slide eight and HomeSafe. Last quarter, we recognize that we delivered a status update that was devoid of clarity. It was the truth, but we also recognize the market does not like uncertainty. As you can well imagine, our team and Transcom have been working very hard together to provide more clarity. We created a joint TIGER team with Transcom to improve the integration of government and contractor systems.

We added additional leadership with specific operational expertise. Together, we are partnering with individual services branches to drive organizational change management. We are jointly committed to a successful path forward and feeling very upbeat. I am thus pleased to report that round one systems testing was completed successfully in January. Now, this clears the way to starting operational test moves at the local level in spring of this year. The volume ramp will be in a controlled manner through the year, with the expectation of significantly ramping up into 2025, especially the busy season. International moves will then follow as we head into 2026. In short, circa a delay of one year.

Now, remember, this is a nine-year program, so although a delay is always frustrating, I believe it has allowed both sides the time to de-risk the startup and, of course, the ramp, which ultimately is a good thing. In addition, we have reached contractual agreement with Transcom on an extended and funded establishment and test period, which covers HomeSafe's project management and development costs up until we reach a sufficient volume of moves, therefore insulating us from carrying overhead costs before higher volume moves get underway. Now, I've seen some reports and quite a bit of media noise on the supply chain side of the moving and transportation industry. Firstly, I'll start with emphasizing the intent of this program is to redefine the moving experience of our military personnel and their families.

Secondly, it's to deploy an IT backbone with intelligence to retain data and knowledge that allows for optimization and, importantly, accountability. To achieve this, we require a certain level of disruption, and, of course, disruption leads to change. To demonstrate the maturity of the supply chain development for the contract, here are statistics on the current state of our supplier network. In the HomeSafe digital supplier management system, we have over 2,200 suppliers registered as of today, of which 380 have already fully executed contract agreements, which can provide 100% coverage of our current service areas. And we have several large van lines also committed to the program once we get to higher volumes. The new global household goods contract is not only limited to current DoD-approved providers and will be open to a broader set of the transportation market.

We intend and commit to being entrepreneurial and innovative, attracting not only traditional van lines and owner-operators but also non-traditional providers to do moves in a more efficient manner. I suspect the supply chain will change in areas, and there will likely be noise as a consequence, which is only to be expected. Both HomeSafe and Transcom are committed to these outcomes, which include paying a fair and reasonable rate to service providers, rewarding those that perform with additional volumes, including small businesses, of course, and providing better services to our DoD families. So what does this mean for 2024? We have a more defined path forward and are in a much better position given the recent modification agreement and supply chain developments. We intend to set initial 2024 guidance with a very conservative view of HomeSafe.

With local test moves beginning in the spring, we expect nominal amount of revenue, circa $125 million-$175 million, during the year, with profits, as we've guided before, at the mid-single digits and increasing over time to align with our GS margins today. Of course, we expect volumes to ramp considerably in 2025 with the domestic busy season and, again, in 2026 as international moves are added. One quarter is sometimes a long time in business, and clearly, there has been significant progress since Q3. And I want to be very clear: we're extremely upbeat about HomeSafe and what it can deliver to men and women in uniform but also to our shareholders over the years ahead. I will now hand over to Mark, who will cover the quarter, the year in a bit more detail, and, of course, 2024 guidance. Mark.

Mark Sopp (EVP and CFO)

Great. Thank you, Stuart. Hello, everyone. I'll start on slide 10 with the Q4 results. Then I'll hit fiscal year results, capital structure matters, and then finish with our guide for 2024. So first up, we were pleased to finish fiscal 2023 with a strong Q4. Top line grew 8% in the quarter, all organic, with amplified growth and profit. Adjusted EBITDA was up 20% with contributions from both business areas in volume and also in margins. I'll hit the drivers of this when I cover the segment slide here in a moment. Adjusted EPS was $0.69 for the quarter, in line with expectations. Q4 2023 adjusted EPS does reflect considerably higher interest costs and a higher tax rate than the prior year quarter. Operating and free cash flow results finished strong, enabling a terrific full-year outcome.

As Stuart indicated earlier, cash performance was critical in building our treasury to enable us to fully settle the convertible maturity and warrants and get that out of the way as we entered into 2024. Over to slide 11. For the full year, all metrics were on or above our plan and also consistent with our long-term targets. So we're very pleased with that. Revenue was just about at $7 billion for the year, just a hair under, up 11% over 2022 on an ex-OAW basis and up 6% without that adjustment. Adjusted EBITDA grew to $747 million. That's up 12% over last year, driven by 50 basis points of adjusted EBITDA margin improvement. This improvement was attributed to excellent project execution across the board and greater growth contribution, favorable project mix, and economies of scale from sustainable tech.

Adjusted EPS was up 7% for the year and in line with our original guide for 2023. In the end, it was pleasing to see our operations overperform on the EBITDA line to offset about $20 million of unplanned headwind in interest expense. Operating cash flow of $463 million was one of the highlights of the year. We overperformed here relative to our guide, with more client advances received in STS and better-than-expected accounts receivable collections across the board in Q4. The team really worked hard and well together to lower DSO all year and also negotiate favorable cash terms on new contracts. This result underscores our quality of earnings and also client satisfaction across both segments. As I will discuss further in a moment, advances and strong collections are probably accelerations to some degree, so we expect to see some flip side of this in 2024.

Now onto slide 12 for segment performance. I'll start with STS. As we have mentioned a number of times, our focus in this segment is EBITDA growth, which includes after-tax equity and earnings from unconsolidated joint ventures, for which we report no revenue. As seen on the left, Q4 was a continuation of a stellar year for STS. We're seeing strong global demand for energy security requirements, decarbonization solutions, and new energy transition enablers that we provide. Our business model in STS provides a good demonstration of the ability to quickly convert demand to EBITDA in leveraging IP licensing, product sales, and quick ramp-up on sustainable services all simultaneously. STS finished the year with ongoing growth plus superb margins and cash flow, with new business bookings paving the way for more success in 2024. Adjusted EBITDA growth was 42% in the quarter.

All parts of STS are contributing to this result across offerings like licensing, equipment, design and engineering services, and also across multiple geographies and multiple verticals like ammonia, chemicals, olefins, and various emerging areas. For the full year, Adjusted EBITDA was up 50% for all the same reasons as we had in Q4. Geographically, revenue in the Middle East and Europe was up about 37%. U.S. was up about 11%. Asia and the rest of the world was up about 44%. STS, indeed, is a global business. Over to the government segment on slide 13. Q4 revenues were up 6%, with Adjusted EBITDA up 8% on improved margins. Growth drivers were defense and intel and also international, up 22% and 15%, respectively. Within these bright spots were resumed pace on DE M-SHORAD. Stuart mentioned that earlier.

Terrific growth in defense and intel on advanced technology projects funded under the RDT&E budget across our expansive IDIQ portfolio. Also continued excellent performance by our Frazer-Nash Technical Consulting platform. Science and space had modest growth, with the Fed Civ budgets constrained by the continuing resolution. Readiness and sustainment pulled back with reductions in the European Command theater. We tie this directly to the funding debate in Congress on military support levels to Ukraine. For the year, revenues were up 7% ex-OAW, with margins at 10%, in line with expectations. Earlier in the year, readiness and sustainment drove quite a bit of growth, while defense and intel and international lagged due to the DE M-SHORAD delays, now resolved, and the government turnover implications in Australia.

As you saw in Q4, it's good to see D&I and international return to higher growth to offset the political issues we're dealing with in readiness and sustainment and the Ukraine. This is a clear demonstration of the strength and resiliency of our well-diversified government solutions business. So that summarizes the P&L. Let's move over to slide 14 for cash flow and capital structure matters. In 2023, we used cash in three main ways. We retired two risks, the convertible notes and warrants, and also the legacy legal matter. The third use was returning about $210 million of funds to shareholders via buybacks and dividends. As Stuart said earlier, we were pleased to be able to lean forward and resolve all elements of the convertible either on time or in advance, and doing so without dilution so that we would not carry this overhang into 2024. So that's done.

The Convertible Notes and warrants, the legal matter, and the return of capital to shareholders used about $950 million in cash. Quite amazingly, with Adjusted EBITDA growth, strong free cash flow, and by tapping repatriated cash, we finished 2023 with a net leverage ratio of 2.1, flat from last year, no change year over year after all of that deployment. So we think this is quite an accomplishment and means we manage these various deployments without strapping us with burdensome debt going forward. In January of this year, with the Convertible Notes out of the way and with favorable signals that we got from the Fed in late December, actually, we jumped on the opportunity to refinance much of our debt. The details are provided in recently filed 8-Ks. But to summarize, first, we had a cluster of debt maturities in 2026 and 2027.

In the refinancing, we pushed those out to 2029 and 2031, mitigating our maturity risk substantially. And second, while keeping total debt neutral, we upsized the longer-term maturity term loan B and freed up almost all of our $1 billion revolver availability. So that move enhanced the capital deployment options significantly moving forward. The combination of taking care of the convertible and refinancing of the loans is a boost to our capital structure and certainly better supports our growth strategy going forward. In terms of the strategy for capital deployment going forward, our priorities are not changed, but our options are clearly more robust with the recent actions we've just taken. For a long time, we have committed to paying an attractive level of dividends while also holding leverage levels at responsible numbers.

We've also sought to keep payout ratios relatively constant as we generate net income and free cash flow growth. In line with this and in conjunction with initiating our 2024 guidance with continued growth, we are increasing our annual regular dividend from $0.54 per share to $0.60 per share. This will take effect the next record date of March 15. This marks the fifth year in a row of increasing our dividend by a significant amount. Deployable capital after dividends will be directed toward either M&A, buybacks, and/or debt reduction based on our view of the best long-term contribution to shareholder value. And finally, to maximize flexibility, our board has just approved replenishing our stock buyback authorization to $500 million. I'll finish up with our guidance for 2024 on slide 15.

We are pleased to again set expectations for ongoing growth in profits and cash flow, reflecting healthy end markets, strong offerings, and new business momentum coming out of 2023. We expect revenues in the $7.4 billion-$7.7 billion and adjusted EBITDA in the $810 million-$850 million range. The midpoint in the adjusted EBITDA reflects a growth rate of 11% over 2023. We expect adjusted EPS in the range of $3.10-$3.30, which represents a growth rate of 10% at the midpoint. The adjusted EPS guide reflects about $15 million more of interest expense over 2023, primarily from higher rates. The guide also assumes a higher tax rate in the 25%-27% range. As I said last quarter, this is due to higher international mix.

Share count is assumed at 135 million units, which excludes capital deployment but includes a modest level of repurchases to offset our annual share count creep. As for timing, we expect about 45% of adjusted EPS in the first half, 55% in the second. This is due to expected timing of projects, including work in Europe due to the continuing resolution and funding for Ukraine, as well as the HomeSafe ramp and the overall growth trend in our business. For adjusted operating cash flow, we exceeded expectations in 2023, which did include some cash advances in STS in Q4 and also strong collections in government as well. As said earlier, there's about a $20 million give-back on this to 2024, but our guide is still up with a range of $450 million-$480 million of operating cash flow for 2024.

In sum, there are a few highlights worth reemphasizing here. First, we met or exceeded all key financial metrics in 2023 with overperformance in Adjusted EBITDA generation, which, as said, offsets some of the interest expense headwinds we had. Second, over the course of 2023 and so far in 2024, we've de-risked our future in several ways. We continue to demonstrate superb cash flow production, which opened up opportunities to improve our capital structure for the future. That included settling our convertible notes and warrants and also settling the legacy legal matter and finally extending and improving our credit facilities. The third point I'd emphasize is our core business momentum and recent bookings does, indeed, drive growth plans for 2024 and well beyond that.

Those elements together enable an attractive growth outlook for 2024, a catalyst for attractive growth again in 2025, including a meaningful planned ramp on HomeSafe and a more flexible capital structure to expand deployment opportunities, which represent an upside to our outlook. Thanks for your patience through all of that. Now back to Stuart to wrap it up. Stuart?

Stuart Bradie (Chair, President, and CEO)

Thank you, Mark. Now, let me summarize with a few takeaways. Strong finish to full year 2023, concluding an absolutely stellar full year. Backlog in options up 10% and adjusted EBITDA growth of 12% year-over-year, with, of course, margin expansion. We have a de-risked 2024 and beyond with the convert and warrant settlement, legacy legal resolution, and refinanced capital structure. The balance sheet is in real good shape, giving deployment optionality, a key takeaway.

A more defined path forward on HomeSafe through continued partnership with Transcom and positive supply chain developments. Over 75% work under contract as we start the year against a full year 2024 guide that delivers double-digit growth in both adjusted EBITDA and adjusted EPS midpoints, with effectively no capital deployment baked in, which, of course, is an opportunity as we progress through the year. So committed to delivering sustained growth for KBR shareholders with adjusted EBITDA in line with our progression towards our 2025 target of $925 million EBITDA. Thank you for listening, and I will now hand back to the operator, who will open the call up for questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. To withdraw your question, please press star, followed by two. Our first question today comes from Tobey Sommer from Truist. Your line is now open. Please go ahead.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning. As you look out into 2024 with your guidance, how should we think about it at the segment level in terms of the trajectory of organic growth in GS and STS?

Stuart Bradie (Chair, President, and CEO)

Yeah, thanks, Toby. I mean, our sort of original targets that we set forth towards 2025 are unchanged there. I mean, the growth in GS is between 5%-8%, and the growth in STS is in the low double digits. And we expect that to continue.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

And within the STS segment, I guess you exited the year at around a 21% margin. How do you think about leverage in that business in the opportunity for margin expansion given double-digit expectations for organic growth?

Stuart Bradie (Chair, President, and CEO)

Yeah, I think, Toby, we're ahead of pace in terms of achieving our we said we'd be in the high teens, low 20s over time, and we've got there faster. I mean, our expectation is margins will kind of hold where they are today through the course of the year, and that's embodied in the guide.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okay. One quick one on HomeSafe. Given the delays and sort of from when the initial contract was led, the extended sort of litigation and protest period, and now this, will the duration be extended as well, or sort of the clock start a little bit later as a result of these delays, or would the original timeline still hold for the end of that contract?

Stuart Bradie (Chair, President, and CEO)

I mean, certainly the protest period and the legal pieces with the time of the contract. But to date, the contract term is 9.5 years or so. There will be, obviously, recompetes and things like that at the end of it, but that holds as it stands today. There's no extension to that just because of the we did start the development work. It has taken longer. That's just part of the deal, I think.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

And last word, if I could sneak it in.

Mark Sopp (EVP and CFO)

Sorry, Toby. It's Mark here. Just once we start real moves, that's when we really should consider the clock to start to tick on the nine-year period that Stu mentioned.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Gotcha. Okay. That's helpful. And then for your guidance, do you assume that a budget and supplemental spending bill are passed? Because I did see sort of the apportionment of 45% of earnings in the first half and 55% in the back half.

Stuart Bradie (Chair, President, and CEO)

Yeah. I mean, there's obviously a bit of HomeSafe in that buildup. As we go through the year, we expect more in the second half than the first half, obviously, as first moves are only in the spring. We do have. You've seen the volatility in our R&S business due to, I guess, a little bit of a slowdown in EUCOM that is flatlining at the moment. We've kind of assumed that as we progress with a bit of upside coming at the back end of the year. I think the other thing to take into consideration in that statement is we have 75% of our work under contract today. I think that puts us in a very sound position. We've always said there's multiple pathways for KBR to deliver EBITDA. As Mark explained in his remarks, we're growing substantially in defense and intel and international.

The trajectory of those businesses going into 2024 is actually very, very healthy because of the work they secured near the tail end of the year also. So I think there's different levers to pull there. So I don't think we're counting on resolution of budgets or and those are difficult to predict, and it would be falling for us to sort of assume anything around there. We've actually based it on our business as it stands today, and we've got some conservatism in certain place. And I feel that we're well positioned to deliver what we've actually guided.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question today comes from Michael Dudas from Vertical Research Partners. Your line is now open. Please go ahead.

Michael Dudas (Partner and Senior Equity Research Analyst)

Good morning, Jamie, Mark, Stuart.

Stuart Bradie (Chair, President, and CEO)

Hey, Mike.

Mark Sopp (EVP and CFO)

Hi, Michael.

Michael Dudas (Partner and Senior Equity Research Analyst)

Stuart, I know you'll give more details next month at the primer, but maybe you could share, as you're looking out towards the pipeline of opportunities and business on STS, any significant changes in what clients are demanding relative to the services you're providing or the technologies? Are the ammonia, hydrogen markets you've booked some good projects could still have great visibility? Of course, there's always a lot of noise about puts and takes on clean energy focus elsewhere. So I just want to get a sense of that as your comfort level heading through 2024 and with the margin mix improving or at least maintaining those levels into 2025.

Stuart Bradie (Chair, President, and CEO)

Yeah, good question, Mike. I think I would like to just start off because I've seen some of the early reports coming out on book-to-bill and STS, and I think some of the folks are a little bit off the mark. And that's kind of perhaps somewhat our fault as well because in our disclosures, we don't give a breakdown of the equity and earnings backlog. So in STS, if you exclude the equity and earnings backlog piece where the LNG projects are running at peak at the moment, the book-to-bill was 1.1 in Q4. And over the year, the backlog grew 15% in that core business. So I just wanted to give some context there. And most of that is coming across the Energy Trilemma. Well, all of it, really, there's a lot of installed base that are trying to decarbonize.

You've got energy security concerns and a lot happening, particularly in the Middle East, as they look to, I guess, change up their mix of products and actually decarbonize their own industries. And the level of ammonia work that we've won through the year is very, very impressive. And obviously, we've now got Ammonia Cracking as well that actually takes the ammonia and turns it back into hydrogen. So we're seeing no slowdown in that market. I think when you look at the overall spend, the capital spend, and we'll talk about this in the primer, I mean, the energy security piece is dwarfing energy transition, but every year, the percentage of energy transition spend increases.

So as we are very well positioned in the energy security market and the things that we do in sort of taking forward energy security with a decarbonized thematic, which is terrific for us and a very large installed base to leverage off. And then secondly is energy transition, whether that's ammonia, hydrogen, or any derivative thereof like methanol. We're very well positioned as that market continues to grow. And you've seen our success in those areas, and we're very much at the forefront of multiple green ammonia projects that we've announced recently, etc. So I think it's going to be an increasing part of our portfolio, but it will happen over time. But I think that's absolutely fine for us because we can play in energy security as well as energy transition. And as those two come together, we're very well positioned.

Operator (participant)

Our next question today comes from Bert Subin from Stifel. Your line is now open. Please go ahead.

Bert Subin (Managing Director and Senior Equity Analyst)

Hey, good morning, Stuart and Mark. Thank you for the question.

Stuart Bradie (Chair, President, and CEO)

Hey, Bert.

Mark Sopp (EVP and CFO)

Hi, Bert.

Bert Subin (Managing Director and Senior Equity Analyst)

Maybe just to start on the 2024 guide, it seems like $3.10-$3.30 on the Adjusted EPS side is pretty good considering you're not assuming any capital allocation sort of beyond the share repurchases to avoid creep and you're factoring in a considerably higher tax rate. If we think about maybe the higher end of that range, excluding capital deployment, if you're ending at $3.30 a year from now, we're talking about it, is that more driven by Government Solutions, or is that more driven by STS?

Stuart Bradie (Chair, President, and CEO)

Yes. I mean, I think the important takeaway is that the combined EBITDA keeps on our path to $925, which we committed to last quarter, and we're feeling pretty good about that, particularly with where HomeSafe is heading as well. Obviously, if CR resolves sooner and there's more funding flowing to Ukraine, there could be upside towards our assumptions on the spend in EUCOM, etc. But also, we've got a very, very strong pipeline in STS. And I think ultimately, if we win our fair share there, that could also outperform a bit. But I'd like to stick to the guide. I mean, double-digit growth. I mean, our revenue's up 9%-10%. Our EBITDA is up 11%, which shows slight margin expansion across the portfolio.

It keeps us very healthily on track to what people thought were very lofty targets back in the day, and we're well on path to achieving those. As you say, we've got capital deployment optionality. I think we keep talking about the levers we can pull and the fact that we didn't get derailed last year with the slowdown in EUCOM. We still exceeded expectations, particularly in EBITDA. Again, with D&I outperforming and international outperforming and STS outperforming in truth. I think you'll see ebbs and flows across the segments through the course of the year. That's why I said yes to both. I think there are opportunities across both segments to do well. If the stars align, obviously, that would be terrific. But our guide is our guide, and that's what we're sticking to.

In this market, with volatility and uncertainty, I think doing double-digit growth with a very high proportionate work under contract is a very good place to be.

Bert Subin (Managing Director and Senior Equity Analyst)

Stuart, maybe just to follow up on some of the comments on HomeSafe and the 2025 target. Just based on what you said in your prepared remarks and what we see in the presentation, I guess international starting in 2026 would sort of assume that HomeSafe exits 2025 at around 80% ramped, just if that's the process, 80/20. If we're doing that math on top of $830 million as your midpoint in 2024, it would get us fairly close to $925 million just on HomeSafe. It probably only assumes low single-digit EBITDA growth the rest of the business. Can you just give us sort of how you're thinking about that number?

I guess last quarter, when you had mentioned it, you sort of noted that you think you could hit $925 with pretty little contribution from HomeSafe. I'm just curious if anything changed or if that's just sort of a conservative watermark that you're planning towards.

Stuart Bradie (Chair, President, and CEO)

Oh, the latter. We're in a position today where we've tried to give you far more clarity on HomeSafe for 2024, and rightfully so, given the progress we've made. There will be significant ramp in 2025 and again in 2026. But I think we need a little bit more time to give you color on that. And of course, we're looking at an investor day later on this year. And obviously, that will give us a little bit more time.

So I don't really want to give you numbers today on 2025 or 2026 because I got a significant punch in the nose last quarter for not being able to live up to expectations, so that's a lesson learned there. But we're feeling really good about HomeSafe, and we've talked about it often. And I think you—I mean, all the sell-side and a lot of investors know they expect a ramp over time. But we're not going to give you numbers today if that's sorry to be so vague, but I think that's probably the prudent thing to do. And I would rather be conservative in that sense.

Bert Subin (Managing Director and Senior Equity Analyst)

Oh, very, very helpful. Just one quick sort of clarification question to some of the earlier STS comments. Middle East has been really strong. I haven't seen decay. I'm not sure if it's out, but I think you were running at over 60% growth there through the first three quarters. Is your expectation that that's going to be the strongest growing market for you in 2024? And is there any potential U.S. catch-up with IRA?

Stuart Bradie (Chair, President, and CEO)

Yes to both of those questions. The Middle East continues to be buying the capital spend profiles enormous across every other part of the world. I think Saudi's slated to be the fastest growing economy this year and again, next year, likely. And clearly, they've got their Vision 2030, and they're executing on it. And we've got a significant pipeline and growth not only in Saudi but in Abu Dhabi and in Kuwait and other countries in the Middle East.

And there's no doubt the southern hemisphere in general is driving a lot of global that any sort of level of global growth is going to come from there in our business. But in terms of the IRA bill, we did a deep dive on that recently. We understand the drivers and all the seven hubs. We recognize that at the moment, there's very low drawdown on the $7 billion from the government. I think people are still forming rather than storming, if you like. But we recognize which hubs we can really add value to, and we're in discussions there. So as they start to progress, there's very much an upside, I think, for KBR.

Bert Subin (Managing Director and Senior Equity Analyst)

Thanks, Stuart. Appreciate all the color.

Operator (participant)

Our next question today comes from Mariana Perez Mora from Bank of America. Your line is now open. Please go ahead.

Mariana Perez Mora (Director and Sell-Side Equity Research Analyst)

Good morning, everyone. So my question is on defense and intel. Could you please discuss what are the main drivers in terms of contracts or technologies, and how should we think about that for the next three to five years?

Stuart Bradie (Chair, President, and CEO)

Yeah. The defense business and defense and intel is obviously in two separate subsegments, if you like. The defense piece is mostly driven around the SETA business, as others would know it. We've got a very strong IDIQ portfolio, and we've got very excellent contract vehicles. The one we've talked about the most is IAC MAC, and that allows us for very short-term procurements. And because the size of the contracts are not amazingly large, we don't often announce it until we get to aggregate numbers. But the bookings there were significant last year, and the growth in that particular business was in the high single digits and standalone.

And it seems to be the cadence of that business. And I think the other attribute of it is it's becoming more digitally differentiated. And so the scope that we're seeing on recompetes and our recompete win rate is very, very high in that business just by the technical nature and domain expertise that we deploy. And we've seen scope and margin creep as a consequence of that digital differentiation. So that's the defense side. And through defense modernization, which is, of course, a big strategic thrust of the DoD, but also overseas as well, that is in good shape to continue with that growth profile. On the intelligence side, we do a lot of work for the three-letter acronym agencies, and we've made particular inroads post the Centauri acquisition of changing, I guess, our profile from a small business into a prime.

And that's starting really now to take hold, and we're seeing quite a lot of significant wins in that arena. And then we had some delays last year, as you all know, on the directed energy program, which resolved itself in Q4 and as we move forward with another couple of vehicles in that laser program. So again, I think through 2024, that business itself will be growing in the double digits. So I think that defense and intel portfolio is a real growth driver for us going into next year and really helps us with any volatility that may happen in R&S. So yeah.

Mariana Perez Mora (Director and Sell-Side Equity Research Analyst)

Thank you very much. And then if I may, can you please discuss international as well? Where do you see most growth coming from? Is it energy, military, or any specific country or region?

Stuart Bradie (Chair, President, and CEO)

Yeah. So in the government realm, as you all know, we acquired a business called Frazer-Nash and added to it with two other sort of high-level consultancies in the digital and the advisory space. We've now integrated that business fully as we came through last year. That's really starting to pick up momentum, which is terrific. It really comes in at high margins as well as you would expect with that sort of high-end differentiated consulting engineering portfolio. Frazer-Nash is a little bit unique because 60% of its business is in the government realm, some classified, some in digital, some in cyber, but also in things like nuclear assurance where we're probably the leading consultant. When you look at things like AUKUS and the new nuclear programs that are around, obviously, we're very well positioned there.

The other 40% of its business is actually in the commercial arena where it does energy transition advisory. It does work in solar, etc., and does a lot of consulting in helping businesses decarbonize with some software tools that allow them to actually measure how they're doing. So it's quite a diverse consultancy portfolio but very much pointed at our two businesses. So that's gathering a good head of steam. And then secondly, the Australian government changed last year. It slowed us down a little bit. They've come through their review, and now we're starting to see quite a bit of, I guess, clarity in that market. And we've sort of rebaselined and we're starting to see growth coming through in Australia as well, particularly, again, and I would say, in that high-end consulting area, whether it's in digital, cyber, or interoperability around software.

So I think it's a very strong portfolio performing in those key markets today with an opportunity to then move more into the other areas of what I would say that are friends of allies, if you like, in the Middle East and things like that, where we're seeing quite a level of bid activity today. So it's got a very strong outlook, the GSI business. In terms of the question on energy, as we said earlier, I think there's a huge, huge capital spend, particularly in the Middle East, but also in Asia and somewhat in Australia as well. As you all know, we're doing the Pluto project down there, the Pluto LNG sort of revamp for the existing facilities there on a cost-reimbursable basis. So there's lots happening across both ends of the portfolio.

Yeah, and it's very attractive going forward, and I don't see that slowing down.

Mariana Perez Mora (Director and Sell-Side Equity Research Analyst)

Thank you. If I may, last one from me on HomeSafe. Margins. Usually, logistics programs are in the mid-single digit margins. What are the main drivers that will drive HomeSafe to the type of margins that global government services has?

Stuart Bradie (Chair, President, and CEO)

Yeah. I think, Mariana, you've got to remember our role there is we are not the we're doing supply chain as a service. We're actually not the we don't physically have trucks or warehousing or packers and things like that. We're coming in to manage a program at scale, to somewhat look at a new way of moving the families of the military.

And ultimately, we're deploying a very digital backbone to this so that we can deploy AI and ML so that we can actually drive efficiency by not running, thinking rudimentary, two trucks to the same place at the same time because they're through different providers, but actually unifying that and taking efficiency gains, which, of course, will drive our margins but also reduce the carbon footprint of that industry. So I think our role is very, very different than a typical logistics supplier in that realm. And that's why we talk about increasing margins over time because I think the more we do it, the more efficient we'll get, the better providers will get more volume. We'll get volume discounts as a consequence, etc. So it's quite easy to step back and look at the logic behind this.

That doesn't mean it's easy to get done, but we're well on the pathway now, and we're pretty confident that over time, we can get the margins down. And as I said in my prepared remarks, we're being very innovative at the way we're looking at this, and we're not restricted at all to the current DoD supply chain, which I think has been missed by many in the media.

Mariana Perez Mora (Director and Sell-Side Equity Research Analyst)

Amazing. Thanks so much.

Operator (participant)

Our next question comes from Jerry Revich from Goldman Sachs. Your line is now open. Please go ahead.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Yes, hello. Good morning, everyone.

Stuart Bradie (Chair, President, and CEO)

Good morning.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Stuart, I'm wondering if you just hi. On HomeSafe, so congratulations on the progress in terms of ramping up signed contractors. Can you put in perspective the 2,200 that you mentioned in your prepared remarks? Where does that number need to get to for each of the phases? I know you're going to roll it out based on the types of moves. Can you just frame that for us, if you don't mind, on where we are relative to the ultimate number?

Stuart Bradie (Chair, President, and CEO)

Yeah. So I think we've, as I also said in the prepared remarks, we've got enough of the supply chain signed up for certainly what's in front of us, and we're obviously expanding that daily. So I'm feeling pretty good about the supply chain and the engagement of the supply chain. For the 2,200, we've got a supplier database that allows the people to sign up, or companies to sign up, including small businesses, and to really sort of register their interest to provide services to Home Safe. And that's the 2,200. And out of that 10 to 2,200, we've signed 380 contracts already.

So we've got very, very good coverage across the supply chain for what we expect going forward.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Okay. And then can I ask, in Sustainable Technology Solutions, can you just talk about the moving pieces within the portfolio, the growth outlook that you see for the longer cycle part of the business, ammonia and plastics, how fast is that growing in 2024? And then for the shorter cycle business, what amount of activity do you need to see in terms of bookings turn into revenue relative to the double-digit organic growth outlook that you mentioned?

Stuart Bradie (Chair, President, and CEO)

Yeah. STS is going into the year probably with its highest level of work under contract that we've seen in recent times. So we're feeling pretty good about that double-digit growth for sure. And it's a good balance. I think that's why we feel quite confident.

It's the sustainable services piece of the business, which is really underpinned by the technology, is going great guns. We'll explain a bit more about that in the STS primer and then again Investor Day. I think the drivers around ammonia we talked about earlier, so I won't cover that again. That rolls into hydrogen, of course. I think energy security continues to play a big part in this, and you've seen that from many of the energy companies. They want to, they've got to continue to really think about energy security in a very concise way, but they are trying to do it in a responsible, decarbonized solution, and we are really at the forefront of that. I think we're very well positioned. In plastics recycling, again, that's kind of a different market.

We'll be producing first product, I think, coming to the end of this quarter, early in Q2, in the Wilton site in the Mura facility. And I think that really opens the door to accelerate that market. I think everyone's waiting to make sure that that all works. And of course, what we've not really said to the market, and probably good to do a little bit today, is the fact that there's two other facilities that are being built, one in Korea and one in Japan. And they could end up actually if Wilton slips a little bit, they'll end up going first. So we've really got three sort of world-scale plants happening all at the same time now. And one of those is with a modularized solution that we sort of developed after we took additional investments.

So that bears well for speed to market and cost-effectiveness, etc., as this continues. So we're really upbeat about that plastics recycling market. And again, we'll cover more of that in the primer. The other market that's really hot at the moment is olefins, and that's particularly coming out of the Middle East. Both Aramco and SABIC in Saudi have got considerable programs. My expectation is it'll be difficult for everything to happen in parallel. There'll be a little bit of a series development there, but that's kind of okay for us as well because that just expands the pipeline over time. And I think we're very well positioned on the LTC program we've talked about before, the liquid to chemicals program. And hopefully, we can get to really sort of announcing something on that later this quarter, and if not early Q2.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Okay. Super. Thanks.

Operator (participant)

Our next question comes from Steven Fisher from UBS. Your line is now open. Please go ahead.

Steven Fisher (Managing Director and Senior Equity Research Analyst)

Thanks. Good morning. Stuart, you mentioned the desire to be a little vague on 2025 when you were asked about when you were asked about the HomeSafe amount embedded in there. But maybe to ask you about the STS angle, I think you had previously expected upside to STS to more than make up for HomeSafe. So has anything changed in your thinking about that and the framing of the STS potential contribution? It sounds like from the answer you just gave, Jerry, there's quite a bit happening and potential for upside there. And then I guess, can you maybe just give us your latest thinking on the synergies between STS and government? You did mention in your prepared remarks one particular contract that offered some synergy.

So just curious about sort of the commitment to keeping the businesses together. Thank you.

Stuart Bradie (Chair, President, and CEO)

That's a lot. That's a lot, Steven, one question. Yeah. I mean, I think as we said last quarter, we were confident on the 925 number. And I think with what's happened in HomeSafe, we're even more confident with the 925 number. And I'll probably leave it at that until we get to May or whatever when we have our investor day. On the synergies, I thought I kind of explained earlier on the bit that seems to be the connectivity piece between commercial and government is very much what's happening in government international business. And Frazer-Nash was a perfect example of that I explained earlier.

We're seeing a lot more connectivity in places like Saudi and in Australia, for that matter, where we're very much seeing the contracts there are far more commercial in the government realm. And we're seeing a lot more connectivity between the two businesses and our profile and being able to leverage our reputation from one into the other. So I think, again, I'll sort of limit my remarks to that, Stephen, till we get to our investor day. But it's certainly a hot topic. I understand there's been a lot of discussion around the synergies between these businesses and, in truth, what we should do with them strategically. But we'll get to that when we get to Investor Day, if you don't mind.

Operator (participant)

Our next question today comes from Sangita Jain from KeyBanc Capital Markets. Your line is now open. Please go ahead.

Sangita Jain (Director and Equity Research Analyst)

Yeah. Thank you for taking my questions. If I can ask a couple on HomeSafe, that $60 million of contract modification that was announced a week or so ago, how should we think about that? Is that all 2024, or does that split between 2024 and 2025?

Mark Sopp (EVP and CFO)

Hey, Sangita. First, thanks for visiting us a couple of weeks ago. Great to see you. It's Mark here. The $60 million, we can assume, will be expended this calendar year. And so that is for recognition of the slower ramp, and the overhead will incur along that path, as well as the government and the client asking for more development, more capability out of the system, which we're developing with our joint venture partners. And so it covers both of those realms. And we expect to burn through that this year and start moves in earnest pretty soon and hopefully picking up pace as the year progresses.

Sangita Jain (Director and Equity Research Analyst)

So is that part of that $150 million of HomeSafe revenue for this year, then?

Stuart Bradie (Chair, President, and CEO)

Yes.

Mark Sopp (EVP and CFO)

Yes, it is in the next few months.

Sangita Jain (Director and Equity Research Analyst)

Okay. And if I can ask you one more on HomeSafe, how should we be factoring in backlog for that? How do you plan to do that, and how should we think about it?

Stuart Bradie (Chair, President, and CEO)

Yeah. So good question. There's nothing in backlog today for HomeSafe in terms of moves. And as we start to get clarity, we'll book the backlog is probably the way I would suggest. And when we get up to proper cadence, I think it'll be an annual booking rather than trying to book 10 years in advance. And we've just got to work through that. But that's our thoughts at the moment. So more to come on that.

But I think the takeaway today is that there's nothing really in backlog of any material numbers for HomeSafe in 2024.

Operator (participant)

Our final question today comes from Gautam Khanna from TD Cowen. Your line is now open.

Gautam Khanna (Managing Director and Senior Analyst)

Hey. Good morning, guys.

Stuart Bradie (Chair, President, and CEO)

Hey. Gautam.

Gautam Khanna (Managing Director and Senior Analyst)

I had a couple of questions on HomeSafe. First, so the contract still seems subject to that Service Contract Act. And I was curious, has that been an issue with the folks that you've signed up, the 380+, in terms of their ability to comply? I'm just curious how much of a whatever burden that is on them that might slow the ramp for HomeSafe?

Stuart Bradie (Chair, President, and CEO)

I mean, today, Gautam, the answer is no. I mean, the whole point of SCA and Transcom and KBR are committed to that.

I had a conversation at a very senior level in Transcom a couple of weeks ago on this subject. I think, firstly, we really want providers who are properly behaving properly and doing proper screening and things, as you can imagine, for the military and doing what they should be doing from a remuneration perspective. But between Transcom and ourselves, we're pretty clear that it will not disadvantage KBR commercially either. So I think there's commitment to that. I know there's been a lot of discussion around it. But at the moment, I think it's something we're working through, but I don't see it as a concern. In fact, I see it as a huge positive in terms of the quality of the people that we'll actually get to work for us.

And it absolutely aligns with KBR's values on people and actually with Transcom's intentions as well.

Gautam Khanna (Managing Director and Senior Analyst)

Gotcha. And then we've obviously heard some pushback in the channel from the pricing terms. I was curious if there's any case for economic price adjustments. Have you guys had any indication from the customer as to whether they're looking at that again, or?

Stuart Bradie (Chair, President, and CEO)

Yeah. I mean, it's an ongoing annual review process. And I think we explained that earlier. There are these economic price adjustments built into the contract to review as we go forward. And that includes pass-through increases in things like fuel. And so it's in that sense, I'm pretty confident we'll get this. I mean, we've got most of the supply chain signed up on the terms that we need them to be signed up on already.

Obviously, they've been making hay while the sun shines a little bit during COVID, and I think there's been quite a lot of rate increases. And you can understand the noise. But ultimately, the objective of this is actually to, A, do a better job in terms of quality and make the move experience better for the military families. At the moment, the feedback is not positive in that. And then secondly, is actually to somewhat disrupt the industry so it becomes far more competitive. And a lot of the middle layers are taken out. And we get a focus into the actual truckers and their families. And we actually help them grow their businesses because they're performing and they're accountable. So I expect more noise in that sense. Am I concerned about the rate structure? No, I'm not.

I think we'll work through that with Transcom and the supply chain in collaboration. To date, we have not seen, other than from some making noise in the media, too much trouble in that regard.

Operator (participant)

That concludes the Q&A portion on today's call. I will now hand back over to Stuart Bradie for any final remarks.

Stuart Bradie (Chair, President, and CEO)

Okay. Thank you very much. Good questions. Thank you for your time, as always, and your interest in KBR. I think, in short, we're well on our path to our $925 million target in EBITDA terms, double-digit growth with margin expansion going into the year. All be as well. Mark and the team have done a great job preserving the balance sheet to give it its capital deployment optionality. And with 75% work under contract, we're feeling really good about the year ahead. So all up, very buoyant.

Obviously, the HomeSafe stabilization and a bit more clarity there also really, really helps. So thank you very much indeed. We'll be doing the STS primer, obviously, in a couple of weeks' time, which will lead us into Investor Day in due course. So thank you.

Operator (participant)

That concludes today's Q4 and FY 2023 KBR Inc. earnings conference call. You may now disconnect your line.