KBR, Inc. (NYSE:KBR) Q4 2023 Earnings Call Transcript

KBR, Inc. (NYSE:KBR) Q4 2023 Earnings Call Transcript February 20, 2024

KBR, Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $0.68. KBR, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Drew and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Q4 and FY2023 KBR Inc. Conference. [Operator Instructions] I’ll now hand over to Jamie DuBray, Vice President of Investor Relations. Please go ahead when you are ready.

Jamie DuBray: 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 Investors section of our website @kbr.com. This discussion includes forward-looking statements reflecting KBR’s views about future events and their potential impact on performance as outlined on slide 2. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K available on our website.

This discussion also includes non-GAAP financial measures that the Company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our earnings presentation. I will now turn the call over to Stuart.

Stuart Bradie: Thanks Jamie, and a warm welcome to a 2023 yearend earnings presentation. I will start on slide 5. 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 the day, is 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. So 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 HSSC performance and ongoing commitment to continual improvement. On to slide 6 on business health. I will focus my remarks on the full year performance and outlook. I will also give you an update on HomeSafe. Mark will cover the quarter results, which are 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 ‘24 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 ‘24 and beyond ‘24 strive for continual improvement and deliver even greater investment in our people. But I think it’s important we must also recognize the ‘23 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 No. 7, which is affordable and clean energy.

And as you’ll see on the slide, we’ve listed an example from each of the businesses. In GS-US, we support the FAAVAL project designed to achieve cleaner emissions from airport ground support equipment. In GS-International, we support the UK MOD with testing of zero-emission military aircraft. And 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-months book-to-bill was 1.1x. And 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% to 20% of our revenue on smaller or short-term consulting contracts, plus of course, ongoing contract growth. This is a very solid basis for the year ahead. On to 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. On to 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 in 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 a 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. On to slide 7. 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 1.1x and excluding the large LNG project, which of course has a large burn, the trailing 12-month book-to-bill was 1.2x. I think a really strong indicator that STS, both in technology and sustainable services continues to grow and win work in critical areas aligned 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-on-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 other key markets going forward and their accolade. Our intent 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 DEM-Shorad, high-end consulting via Frazer-Nash, working with the UK 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 on to slide 8 and HomeSafe. Last quarter, we recognized that we delivered a status update that was devoid of clarity. It was the truth, but we also recognized 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, and 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 and international moves will then follow as we head into 2026.

So 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 statistics on the current state of a 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 ‘24 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 to $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, ‘24 guidance. Mark?

Mark Sopp: 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, ‘23 adjusted EPS does reflect considerably higher interest cost and a higher tax rate than the prior year quarter. Operating and free cash flow results finish 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 enter 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 over-perform 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 over-performed 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 on to 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 a 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%. US was up about 11%. And Asia and the rest of the world was up about 44%. So 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 a resumed pace on DEM-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 and also continued excellent performance by our Frazer-Nash technical consulting platform. Science and Space had modest growth with the Fed’s SIV budget constrained by the continuing resolution. Readiness and sustainment pulled back with reductions in the European Command Theater. We tied 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 lag due to the DEM-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 in 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 overhanging to 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 option 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 to $7.7 billion and adjusted EBITDA in the $810 million to $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 to $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% to 27% range. As I said last quarter this is due to higher international mix. Share account 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 for the range of $450 million to $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 I said offset some of the interest expense headwinds we had.

And 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 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 plans 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: Thank you, Mark. Now, let me summarize with a few takeaways. Strong finish to full year ‘23, concluding an absolutely stellar full year. Backlogging 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 refinance 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 ‘24 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 a 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.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Tobey Sommer from Truist.

Tobey Sommer: 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: Yes, thanks, Tobey. I mean, our original targets that we set forth towards 2025 are unchanged there. I mean, the growth in GS is between 5% and 8% and the growth in STS is in the low double digits, and we expect that to continue.

Tobey Sommer: Within the STS segment, I guess you exit the year at around 21% margin. How do you think about leverage in that business and the opportunity for margin expansion given double-digit expectations for organic growth?

Stuart Bradie: Yes, I think, Tobey, we’re ahead of pace in terms of achieving, 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: Okay, one quick one on HomeSafe. Given the delays and sort of from when the initial contract was let, the extended sort of litigation and protest period, and now this is, 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: I mean, certainly the protest period and the legal pieces with the time of the contract, but to date the contract term is nine and a half years or so. There will be obviously re-competes 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: And last one, if I could squeeze which is –

Mark Sopp: Sorry Tobey, 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 Stuart mentioned.

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

Stuart Bradie: Yes, I mean there’s obviously a bit of HomeSafe in that build up 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 UCOM that is flatlining at the moment and we’ve kind of assumed that as we progress with a bit of upside coming at the back end of the year. But I think the other thing to take into consideration in that statement is we have 75% of our work under contract today. So I think that puts us in a very sound position. We’ve always said there’s multiple pathways for KBR to deliver EBITDA. So as Mark explained in his remarks, we’re growing substantially in Defense and Intel and International.

The trajectory of those businesses going into ‘24 is actually very, very healthy because of the work we 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 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 places and I feel that we’re well positioned to deliver what we’ve actually guided.

Operator: Our next question today comes from Michael Dudas from Vertical Research.

Michael Dudas: Good morning, Jamie. Mark, Stuart. Stuart, I know you’ll give more detail 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, market to the books and 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 ‘24 and the margin mix improving, or at least maintain those levels in the ‘25.

Stuart Bradie: Yes, good question, Mike. I think I would like to just start off because I’ve seen some of the earlier 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 but all of it really is, there’s a lot of installed bases 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 in terms of back into hydrogen. So we’re seeing no slowdown in that market. I think when you look at the overall spend, the capital spends 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 a 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 we, 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 et cetera. So I think it’s going to be an increasing part of our portfolio but it will happen over time but I think that 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: Our next question today comes from Bert Subin from Stifel.

Bert Subin: Hey, good morning, Stuart and Mark. Thank you for the question. Maybe just to start on the ‘24 guide, it seems like $3.10 to $3.30 on the adjusted EPS side is pretty good considering you’re not assuming any capital allocations 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 the EPS?

Stuart Bradie: Yes. I mean, I think the important takeaway is that the combined EBITDA keeps us on our path to $925 million, 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 UCOM, et cetera. 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. So, but I’d like to stick to the guide. I mean, double digit growth. I mean, our revenue is up 9% to 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. And as you say, we’ve got capital deployment optionality. So 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 UCOM. We still exceeded expectations, particularly in EBITDA. And so again, with D&I outperforming and International outperforming and STS outperforming in truth. And so I think you’ll see ebbs and flows across the segments through the course of the year. And that’s why I said yes to both. I think there are opportunities across both segments to do well. And 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: Stuart, maybe just to follow up on some of the comments on HomeSafe and the ‘25 target. Just based on what you said in your prepared remarks, what we see in the presentation, I guess International starting in ‘26 would sort of assume that HomeSafe exit ‘25 at around 80% ramps, just if that’s the process, 80-20. If we’re doing that math on top of $830 million as your midpoint in ‘24, it would get us fairly close to $925 million just on HomeSafe probably only assumes like low single-digit EBITDA growth the rest of the business. Can you just give us sort of how you’re thinking about that number? And I guess last quarter when you had mentioned it, you sort of noted that you think you could hit $925 million with pretty little contribution from HomeSafe. I’m just curious if anything changed or if that’s just a sort of a conservative watermark that you’re planning toward?

Stuart Bradie: Oh, the latter. We’re in a position today where we’ve tried to give you far more clarity on HomeSafe for ‘24 and rightfully so, given the progress we’ve made. There will be significant ramp in ‘25 and again in ‘26. But I think we need a little bit more time to give you color on that and of course we’re looking for 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 ‘25 or ‘26 because I got a significant punch in the nose last quarter for not being able to lift up to expectations. So that you 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 expected 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’d rather be conservative in that sense.

Bert Subin: Oh, 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 it like 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 ‘24? And is there any potential US catch up with IRA?

Stuart Bradie: Yes, to both of those questions, the Middle East continues to be buoyant. The capital spends profiles enormous. It dwarfs 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 it’s, there’s very low drawdown on the $7 billion from the government.

I think people are still forming rather than storming if you like. And but we recognize where 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.

Operator: Our next question today comes from Mariana Perez Mora from Bank of America.

Mariana Mora: 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 like three, five years?

Stuart Bradie: Yes, the Defense business, Defense and Intel’s obviously in two separate sub-segments, if you like. The Defense piece is mostly driven around the CEDA business, as others would know it. We’ve got a very strong IDIQ portfolio and we’ve got very excellent contract vehicles, 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, it’s becoming more digitally differentiated.

And so the scope that we’re seeing on recompete, now recompete win rate is very, very high in that business, just by the technical nature and the main 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-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.