KBR Inc

NYSE:KBR

Earnings Call Transcript 2022-Q2

[Operator]

Hello everyone and a warm welcome to KBR, Inc.’s Q2 2022 Earnings Conference Call. My name is Melissa and I will be your moderator. [Operator Instructions]. I now have the pleasure of handing over to our host, Alison Vasquez, Vice President of Investor Relations to begin. Alison, over to you.

[Alison Vasquez, VP, IR]

Thank you Melissa. Good day from the UK and welcome to KBR's second quarter 2022 earnings call. Joining me are Stuart Bradie, President and Chief Executive Officer; and 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 our investors section of our website at kbr.com.

This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance, as outlined on Slide 2. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K, also available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our presentation. I will now turn the call over to Stuart.

[Stuart J. B. Bradie, President & CEO]

Thanks Alison and thank you all for joining us today. I'll start on Slide 5. As you know we always kick off with a zero harm ESG focus and today I want to spend a moment on our expanding partnership with Mura, placing KBR at the center of enabling a global circular plastics economy, so really exciting. In June we committed to invest an additional $100 million in Mura Technology which allows us to participate more fully in this sustainably focused, high growth advanced recycling sector with a global pioneer of advanced plastics recycling, where it’s mission is to enable a plastic neutral future by providing an end-to-end solution to convert a wide range of mixed plastic waste, much of which would be destined for landfill today back into high quality chemical feedstocks. Targeting 1 million tons of annual capacity in operation or development by 2025, Mura licenses its technology through KBR to a global client base and is also developing its own pipeline of global operations.

Our investment builds on the alliance we entered into last year to be Mura’s exclusive technology licensing partner. And with a very collaborative relationship this is I would say a really, really great team and have already produced numerous advances in the process technology such as loop power, water recycling, modularization as you'd expect, and digital operating solutions. And together we have already licensed approximately 170,000 tons of capacity to solve the world's largest chemicals company, so great momentum. Now under an expanded partnership agreement, KBR will also be the preferred services provider for Mura led projects to support project management, engineering, integration, etc. So really adding value is bringing key skill sets from KBR. Now just last week Mura made a big announcement with Dow to develop multiple world scale advanced recycling facilities in the U.S. and in Europe collectively adding up to 600,000 tons of capacity. That will play an important role as a key off taker of the circular feed that Mura produces. Now this announcement is a huge endorsement of the technology and actually represents Dow’s largest commitment to date to advance upscale recycling capabilities. This is just the beginning of what KBR and Mura can accomplish together, so we're very excited by this development.

Now on to Slide 6, and some key takeaways from the quarter. Now before I get started, remember in Q1 we started pretty hot. We outperformed and we raised the guidance. Now this was another excellent quarter for KBR both from a delivery perspective and a future earnings potential perspective. The business is firing on all cylinders. Now that's why we raised guidance last quarter and again why we continue to outperform this quarter. Our people delivered top to bottom with almost 20% adjusted EBITDA growth year-on-year. Now in any market at any time this is exceptional. And even better adjusted EPS growth of over 30% and of course and really importantly cash generation and conversion was a highlight and was again bang on. Now there were puts and takes as you would expect through the quarter and Mark will give you some details on these, an outstanding result all around. As expected bookings in Q2 were absolutely terrific across both GS and SPS, culminating in a good book-to-bill of 2.1x, a great performance.

Now I will cover some of the key awards in a moment but at a very high level we continue to win the right work with the associated earnings profile to support our long-term targets and importantly our margin expansion expectations. A growing book of business underpins these targets and we have built upon this position again this quarter. As you will see later, margin performance was at or above expectations across all areas of business, a really terrific effort by the team, that was helped a little bit by some early contract resolutions and asset sales that Mark will discuss in some detail. But even without these margins were excellent. Also, in the quarter we continued to reshape the portfolio. We divested a couple of non-core investments and then took that cash and invested in the circular economy in a meaningful way via Mura and added key digital transformation skills and customers with the VIMA acquisition in the UK, which we will touch on shortly.

Now on to Slide 7, the outlook for Government Solutions has been, remains, and is arguably increasingly positive for KBR. I want to touch on briefly the proposed full year 2023 defense budgets, early days, but the President's proposed budget represents a 6% increase over 2022 levels. And the House and Senate have each approved incremental increases of $37 billion and $45 billion respectfully. Now it is too soon to tell where this would all land but I think all signs point North. Now while the budget process remains in its fairly early stages, we're encouraged by sizable increases in areas where KBR is at scale across defense modernization, RDT&€, space of course, intel, cyber, and of course LOGCAP given the continued activities in Europe. The cadence of awards in the U.S. and internationally accelerated through Q2 and I think this is reflected in our overall book-to-bill but we expect that pace to continue and to be continued to be elevated through September towards the end of the U.S. government's fiscal year as you're aware.

Now you have seen increased commitments from the U.S., but importantly, also from NATO in relation to supporting Ukraine across a wide range of activities. Now KBR not only supports the U.S. and Europe, but has historically supported both UK and NATO and we're starting to see the beginnings of task orders in this area. While still early and it's too early to tell where this will go but clearly, we are positioned to serve near and longer term missions. As highlighted on the slide, the strong bookings performance means GS now has almost 95% of the work it requires to deliver its 2022 numbers and of course, a very overall healthy backlog.

Now we've highlighted some contract wins this quarter on the right to showcase RDT&E, DEVSECOPS, and other high end capabilities. Awards across our defense and intel business really, really picked up pace via contract via vehicles like [indiscernible] that we've talked about previously this quarter. And our strategy to expand services to new clients and increased contract ceilings, is playing out across the portfolio. A really, really great result by this astute capture team. As you know, we've already talked about this a little bit before we won our largest recompete of the year, which was for NASA. This is the ground systems on Mission Operations contract at Goddard. And this was announced separately at the end of Q1, but went into bookings this quarter. Now this is a five-year contract worth up to $640 million.

Now I'd like to spend a moment on the Next Gen xEVA spacesuit program for human missions to Mars, quite cool. This is a 10-year, $3.5 billion IDIQ contract won by KBR as part of the Axiom Space team, and is a great example of large commercial like contracting mechanisms coming out of NASA today and KBRs ability to contribute in the increasing convergence of government and commercial collaborations in the space domain. So I think, really, really playing on our strengths. Now this program will leverage innovative commercial applications for data and technologies, and in time transition into something that looks like a spacesuit as a service model with NASA as a key customer.

Now this new approach to spacewalk services encourages an emerging commercial market for a range of customers, and also grants NASA the right to use the same technologies on future exploration program procurement. So quite ingenious. Today, we provide maintenance and support to NASA for its ongoing operational spacesuit program, we will continue to perform that work. So over the next several years, wins under the new Spaceship Program will be incremental. The first task order's to be completed include development of the first demonstration outside the space station in Lunar Orbit [ph] and for the Artemis Lunar landing. So really, really exciting stuff.

Now on to Slide 8. We wanted to spend a bit of time showcasing our expanding GS international footprint. And as I've said before, we believe this part of our business is typically underappreciated, but we do think it's a clear differentiator. So we wanted to give it a bit of airtime today. I mean, some key data points. We now have a really diverse workforce of circa 5,000 people across 35 different locations with annual revenues of over $1 billion. This is a very, very high-end workforce that has been built both organically and acquisitively, kind of similar to our U.S. transformation. The time line on this slide shows the quality of assets and people that have come in to KBR over this period. Our capabilities in this portfolio include strategic advisory, high-end consulting, digital transformation, systems engineering, security and resilience, data science, renewable energy, and much more. The business has a very, very healthy CAGR at 10%, as shown here, and very, very attractive EBITDA margins in the teens and it's been performing at that level for quite a time.

Now to reflect the differentiation and the importance of GS International, we've actually strengthened our Executive Team by bringing on Paul Kahn. Now Paul recently joined our executive ranks and reports to me, as we look to further grow and strengthen this part of the business. Now Paul has a great depth of leadership and executive credentials, previously worked for Thales. He was the CEO of Airbus UK and a Senior Executive at Cobham. So I'm very excited to welcome Paul to the team, and I think it reinforces our commitment to GS International. Now more to come on this with obviously the addition of VIMA and increased alignment between the UK, the U.S., and Australia. And I think AUKUS [ph] would be a good example of that. And that's a program we're already engaged on via Frazer-Nash. So good things coming there.

So on to Slide 9. Now with the COVID restrictions lifted in many, many countries, I recently went to the Middle East and got back recently and obviously, been visiting other customers, a long-term IoC and sort of top chemical customers. And I'm absolutely enthused about the STS market outlook more than ever. And our delivery performance there and thus, our reputation has been really, really strong. Now at the forefront of our clients' thinking are things like and this will not be a surprise; energy security, obviously heightened by the Russia-Ukraine war; gas and ammonia as a transition fuel, particularly for energy; a lot of investment and lot of talk about future investment in hydrogen, both blue and green; and of course, opportunities in the secular economy. Now all of these priorities are a backdrop to the long-term supply-demand imbalance driving investment decisions right now. The demand for our high-end services, our decarbonization capability, and our technology portfolio are continually increasing and have been in truth for some time. Now you may recall, our book-to-bill in Q1 was strong. It was actually even stronger this quarter. STS now has circa 85% of its work under contract for 2022 and a very, very healthy overall backlog indeed.

There are some key awards highlighted in the right-hand side. Awards in green ammonia and contracts like the Shah Deniz project demonstrate continued momentum in sustainability, energy transition, and importantly decarbonization of existing assets. Now we've talked about that for some time. Venture Global announced FID on their Plaquemines project. Essentially, this is a copy of the Calcasieu Pass project, which is now producing LNG. And our role here is engineering, project management, integration and commissioning support over the next three or four years. Now this program is fully aligned with our stated risk profile, so no change there. We have a partner, a partner, a really good partner called Zachry, who is the majority partner in our joint venture and they have construction responsibility. And the client itself is furnishing many pieces of the key equipment, including the liquefaction modules and a number of other packages. Now as a minority partner in this joint venture, our profit will come through equity and earnings.

Now on to Slide 10 and some thoughts on STS as an important KBR margin accelerator. STS really, really is all about earnings growth and margin expansion. And I think with VG coming into the mix with a sizable equity and earnings story, that storyline is even more prominent going forward. You will recall that we restructured this business in 2020 during COVID, exiting all lump sum EPC projects and commoditized services, and we did just that. In 2021, it seems like a short time ago, yes, just in 2021, we redoubled our strategy around sustainability as the businesses foundation, formally reorganizing into sustainable technology solutions, and set a very bold course to double this business' EBITDA to $300 million-plus by 2025. Now understandably, this was initially met with some degree of skepticism from investors, but I think you can all see that this team has absolutely delivered.

Now STS is on course to generate circa $200 million of EBITDA this year and that represents almost 30%, of KBR's annual profit. So it's a real, real sort of solid piece of our story. And it posted book-to-bill of 1.8x over the last 12 months. It is on track. It's actually, in truth, ahead of pace to deliver upper teens and into low 20s margins, and it continues to operate importantly with negative working capital. And with strong end markets that are actually getting stronger, this business is set up to deliver where it counts most, earnings growth and cash. And I couldn't be more pleased with the evolution of this business and its accelerating earnings and margin profile. So really, really exciting times ahead for STS. And now I'll hand over to Mark. Mark?

[Mark Sopp, EVP & CFO]

Great. Thank you, Stuart. I'll pick up on Slide 12 for highlights of the consolidated results for the quarter, and then I'll hit the segments after that. As Stuart said, the team really delivered a successful Q2 on all fronts, including playing an important role in critical areas like national security, space, energy security, and energy transition types of solutions all around the world. These roles do enable our clients to advance their impact on these fronts, but those in turn, motivate our employees and the fact they do things that really matter in the world scheme in our team of team's culture.

In Q2, consolidated revenues were up 5% to just over $1.6 billion. Adjusted EBITDA came in at $186 million, up by a healthy 19% over last year. This reflected excellent core margins in both businesses. We also had some goodies flowing through the P&L this quarter, which was also the case actually in Q2 of last year, so I'll cover more of that in a moment. Adjusted earnings per share was up 31% over last year, building on the EBITDA growth, plus favorable year-over-year taxes, foreign exchange, and contained interest expense. Hedging actions benefited FX and interest results and hats off to our Treasurer, Natasha on that one. On the tax side, we had a discrete tax charge last year that did not recur this year. Taxes this year in Q2 were normative at about 25%.

As Stuart mentioned upfront, we announced the $100 million investment commitment to Mura, which would increase our aggregate ownership percentage to roughly 18%. We funded $60 million of this commitment in June of this year. As a result, in Q2 we stepped up our original 5% investment made back in 2021 to its current market -- fair market value with a $16 million unrealized gain. Consistent with past practice, we have adjusted this noncash gain out of our adjusted EPS, but it is indeed an excellent reflection of the quality and value that we and other strategic blue-chip investors have ascribed to Mura. Operating and free cash flow numbers in the quarter were really good and up from last year, $125 million and $112 million, respectively. First half OP cash flow of over $200 million puts us well on pace for the full year guide. Deployable free cash, which is free cash flow, plus the proceeds from the Ichthys subcontractor settlement and the sale of a couple of noncore assets, was terrific at $344 million in Q2, which obviously boosts our capital deployment optionality.

On to Slide 13 and more on our two operating segments. Government growth was 7% in the quarter, the driver here was readiness and sustainment with good on-contract growth and increased activity with the European command. The allied response to the conflict in that area suggests this may be a busy area for us for quite some time, but it is difficult to predict. Even with some tough FX headwinds, International performed well on both the top and bottom line, with our Australia business continuing to post group-leading organic growth and Frazer-Nash performing nicely as well.

Defense and Intel and Science and Space were flattish on the top line, with timing delays this year and elevated material buys in 2021, but came through this quarter with higher margins and profit dollars on better mix and execution. And in fact, all four areas within the Government business improved profit dollar contribution year-over-year, marvelous. As Stuart mentioned, we monetized certain investments in the Government business in the quarter for $40 million in cash and recognized a $22 million gain on asset sales, boosting reported EBITDA margins by about 165 basis points. Importantly, excluding these asset gains, the margins in GS were right in line with our targets at 10%.

Now on to STS. This business, as Stuart said, is very busy right now and growing in higher-margin areas as our strategy set out to do. The pit away from Russia and timing of projects has us a little behind the planned top line number, but we still produced sequential growth of almost 20%. As Stuart highlighted, STS profit delivery was outstanding in Q2, and the outlook for the second half is also excellent. Our solutions and energy transition are benefiting from efforts to move towards a greener future and are further fueled by strong energy prices, energy security investments, and the supply constraints we're seeing stemming from the Russia-Ukraine conflict.

In addition, energy transition is now taking hold with our government customers hope that you saw some of this in our press releases earlier this quarter. STS EBITDA contribution in Q2 was excellent at $55 million with 18% margins. STS benefited this quarter from a couple of items we pulled forward to Q2 but net of these items, margins still exceeded 16%. The margin expansion in the core business is directly attributable to the accelerated growth in the higher-margin areas of this business. As Stuart mentioned earlier, we are ahead of pace to achieve our targeted upper teens-plus margin profile.

On to Slide 14. Net leverage now stands at 1.9x, benefiting from growth in EBITDA, strong cash flows, and Q2 debt reductions, which have helped offset the effect of rising interest rates. Interest rate swaps we previously put in place under more favorable rate conditions are also really helping in this regard. This quarter, our treasury was boosted by the first tranche of recoveries from the resolution of the Ichthys subcontractor matter, proceeds of roughly $190 million plus another $40 million from asset sales.

Deployments in Q2 were about $200 million. We had about $60 million for the first tranche of the Mura investment. We had about $100 million in debt reduction and about $40 million in stock buybacks. We closed on the VIMA acquisition earlier today, so that will obviously be a Q3 event and deployment. Our capital deployment priorities have not changed, but I'd like to emphasize, we plan to be conservative with capital, given the economic and interest rate environment.

On to guidance on Slide 15. We are affirming our current guidance for fiscal 2022 based on strong first half results across the board and overall healthy market conditions. We did have a particularly good mix in Q2 and accelerated a handful of closeouts and benefits this quarter that were originally expected in the second half. With 90% of our work under contract to deliver the rest of 2022, we feel good about our full year guidance, of course and we'll continue to revisit it as we progress through the rest of the year. That covers it from me. Back to Stuart.

[Stuart J. B. Bradie, President & CEO]

Thanks, Mark. Nicely done. Now to summarize. I think we can all agree, we've closed out the first half of 2022 with a bang, double-digit growth in both adjusted EBITDA and adjusted EPS in the quarter. Bookings were absolutely excellent and we continue to win work that will support and deliver our long-term targets and, of course, margin expansion. I'm really excited about the trajectory of GS and the STS business. The market outlook across the portfolio remains robust, and the associated pipeline of opportunities are attractive and aligned with a positive outlook. With the acquisition of VIMA, additional investment in Mura, debt reduction, return of capital to shareholders, we continue to deploy capital in a strategic balanced manner, as we said we would do so, doing what we said we would do.

We have talked today a lot about EBITDA and EPS and rightfully so. KBR is an EBITDA and EPS growth story with strong margins and excellent proven cash conversion, with increasing contribution via equity and earnings in STS, the GS International growth with higher margins and hence earnings. And then when we layer on HomeSafe later this year, where we will fully consolidate but with a 72% share, overall revenue will not really tell you the whole story. Thus, going forward, we'll be talking a lot more about EBITDA and EPS and of course, cash. We work under contract of over 90% for full year 2022, we're really looking ahead now to winning the right work for 2023 and, of course, 2024 to help secure our long-term targets. All in all, another fantastic quarter, building momentum on the path to 2025. Thank you for listening and I'll now hand it back to Melissa, who will open the call for questions.

[Operator]

Thank you Stuart. [Operator Instructions]. Our first question today comes from Jerry Revich of Goldman Sachs. Jerry, please go ahead.

[Unidentified Analyst, Goldman Sachs]

Hi, this is Adam Davis [ph] on for Jerry today. My first question is on the $1.5 billion LNG award. I appreciate that KBR's role in the joint venture will provide services outside of construction and that it's modular design, but we've seen many recent LNG projects that have been over budget. So can you just help us build comfort with the risk factors that the JV is responsible for, is it labor productivity, labor costs, and under what scenarios is the profitability of the JV at risk?

[Stuart J. B. Bradie, President & CEO]

So we feel really good about the risk profile. I mean, it's a very, very good question and one we, of course, expected under this FID. I mean, this is not a lump sum project. There's no lump sum construction. It very much fits with our stated risk profile. The commercial model itself is -- the customer feels there's IP around that and the way they bring to market. But remember, as I said, there is no lump sum construction in this. The services itself do not constitute lump sum risk. And remember, the customer itself is providing the liquefaction modules, I guess, the LNG tanks, the pretreatment. So a lot of that typical process risk actually sits with them and their vendors in that area. And although we're playing an integration role, that typical risk that comes with your LNG type project doesn't exist for us in this construct. So it's a very unique commercial model. I think you should take comfort at our stated comments that it does not change KBR's risk profile. We're out of the lump sum EPC business. We're out of taking construction risk in that context. And of course, we're actually not responsible for the construction. So hopefully, that gives you enough comfort around that risk model. It also comes through equity and earnings for us. And I would say that the numbers themselves are already on the most conservative side, built into our long-range targets.

[Unidentified Analyst, Goldman Sachs]

That's great. And can you just update us on how you're thinking about the revenue burn cadence in Government Solutions from here?

[Mark Sopp, EVP & CFO]

Sure, Mark here. We went through the details relative to the components this quarter. We have built quite a pipeline of outstanding awards. So we are hoping to see some of that decided in our favor as we get through the rest of the year. That will have probably a minor impact this year, but hopefully, a very favorable impact next year. We've got very good visibility in the business we have. It is flat to modest growth overall for the rest of the year quarter-over-quarter, of course, extracting out the effects of OEW last year. So we have seen some delays. We've seen not a lot of decisions coming out. We are pleased with the book-to-bill in Q2, for sure, gets the biggest recompete out of the way. And so we're winning our fair share. Pace of decisions could be better, but we're actually bullish on the long-term outlook and are comfortable with our long-term targets.

[Stuart J. B. Bradie, President & CEO]

Just to pile on a bit there. I think we talked a little bit about this as we went through the prepared remarks. Obviously, the work coming through UCOM, we feel is very positive. And obviously, we're seeing that coming through growth in that segment. And although, as Mark said, it's difficult to predict, I think the cadence of that work through the course of the rest of this year, we don't expect to change too much. And I think there's probably more opportunity given the commitment from the U.S. and NATO as we move into next year.

[Unidentified Analyst, Goldman Sachs]

Got it, thank you.

[Stuart J. B. Bradie, President & CEO]

Thank you Adam.

[Operator]

Thank you Jerry. Our next question comes from Sean Eastman of KeyBanc Capital Markets. Sean, over to you.

[Sean Eastman, KeyBanc Capital Markets]

Hi, team. Thanks for taking my questions. So I just wanted to -- first question is just sort of clarification. We have an intact 2022 guidance after, obviously, some very strong outperformance at the segment level in the second quarter. So it would be helpful to frame how some of these pickups in the second quarter were contemplated in the full year previously, perhaps whether there's any negative offsets underneath that, like FX, for example, just to assess kind of the underlying update on the full year ex the noise?

[Stuart J. B. Bradie, President & CEO]

I mean, Sean, again, a very good question. And I mean, I think the easiest way to answer this is we have an absolutely outstanding first half of the year. We raised guidance in Q1. We are conservative in our nature, as you know, we just came through a very strong Q2. And Mark, who's probably more conservative than I am, actually said we revisit our guidance if we continue to perform like -- progress through the rest of the year. So I think this is more a question on making sure we've got strong performance in Q3. And I think if that comes through, I think we'll certainly be relooking at guidance in a positive way at that point. So I mean there's no guarantee of that, of course, but that -- I think the trajectory would tell you that, that's probably something we should be looking at very carefully.

[Sean Eastman, KeyBanc Capital Markets]

Okay. Interesting comment. Thanks for that Stuart. And then coming back to the Plaquemines award, obviously, quite large. And considering it's going to flow through equity earnings, it would be helpful to get a little bit of idea on how to model that line on a go-forward in terms of quarterly run rate. And also there's going to be no revenue here. I would assume a contract of this size would have an impact on the go-forward STS margin target, maybe it changes the arithmetic there. So any color around that would be helpful as well.

[Stuart J. B. Bradie, President & CEO]

Yes. I mean, we -- I mean, I think our guide on our growth and EBITDA over time for STS is 20% plus. And our margin expansion has room in it to go above the high teens into the low 20s. And I think both of these consider that. So I think we need to get a bit more time under our belt, Sean, to come back and answer that fully. But I think if you look at any business with underlying EPS growth that we've laid out, if there's any skepticism around that, hopefully, some of that skepticism disappears with the announcements today and also the skepticism of margin expansion, etcetera, also, hopefully, some of that skepticism disappears today also. So we'll come back over time, but that's probably the best way to answer it today.

[Sean Eastman, KeyBanc Capital Markets]

Okay, thanks. I will turn it over there.

[Operator]

Thank you for your question Sean. Our next question today comes from Brent Thielman of D.A. Davidson. Brent, over to you.

[Brent Thielman, D.A. Davidson]

Hey, thank you. Maybe just one more on the LNG opportunities. Just wondering if there are sort of similar-sized prospects out there of this sort of scope and stewarded this sort of risk profile that you're out there pursuing and can get involved in?

[Stuart J. B. Bradie, President & CEO]

Yes. I mean, to be honest, I think they are probably few and far between in terms of the commercial model here. And I think the way that VG has done this is quite unique in the marketplace and has proven successful, of course, on Calcasieu Pass, which I think derisks a lot of this project considerably. But that aside, I think that as a proposed Phase 2 in Plaquemines, and we'll see if that comes to fruition in the next little while, there's certainly a lot of announcements by VG on LNG sales. And they've got a number of other prospects within their portfolio that they are trying to progress. And if we perform and things go well, then you would think we would be for a shot with that. But outside of that, today, I'm not -- we're not targeting getting back into the LNG EPC business in any way, shape or form on that lump sum basis. And we'll do some project management work. In fact, we're doing some project management work today in the Middle East around LNG development on a reimbursable basis, and we'll continue to look at those. But our roles will not -- going forward, will be very different than what they were in the past. And I do think that the commercial models that make this successful are not being adopted by others, maybe they will if they see this going really well. But I wouldn't count on it.

[Brent Thielman, D.A. Davidson]

Okay. I appreciate that, Stuart. And then I was interested just in the focus on the international portion of the GS segment. Obviously, a lot of room to build on what you've done and as you call out relatively sort of attractive margins to the overall segment. I mean what -- kind of what's your view of the long-term organic growth potential of this piece of the business and sort of ability to penetrate new program on the international front with what you have today?

[Stuart J. B. Bradie, President & CEO]

I mean, our CAGRs historically have been 10%, and I think that we'd expect that trajectory to continue. And we will realize, we believe, some synergies across Frazer-Nash and VIMA as they come in, and we actually integrate in a way that is united to the marketplace. And also the -- I think that just a stronger connection between the U.S. and Australia and the U.S. and the UK and all three, in fact, I think, plays well to sort of strong footprint in all three jurisdictions. So I think you'll start -- you'll continue to see really, really outperforming growth in some of these markets. And of course, it's becoming an increasingly important part of our portfolio well over $1 billion. And our margin expectations at that level will continue to be extremely attractive. So I think that's why we wanted to highlight to you, it's become a really material part of our business. We tried to give you the transformation color that's taking place there that is similar to the U.S. and going up market, being greater differentiation. And the returns are actually typically more attractive than the U.S. market. So it gives us a great piece of differentiation in that sort of margin enhancement story.

[Brent Thielman, D.A. Davidson]

Very good, thank you.

[Operator]

Thank you Brent. Our next question today comes from Andy Kaplowitz of Citigroup. Andy, please go ahead.

[Andrew Kaplowitz, Citigroup]

Hey, good morning guys.

[Stuart J. B. Bradie, President & CEO]

Hi Andy.

[Andrew Kaplowitz, Citigroup]

So, it doesn't seem like you're having issues, but can you talk about how tight global supply chain and labor markets are affecting KBR, have you seen any cost impacting your margin and/or have any projects been slower than expected to move forward given supply chain or labor issues?

[Stuart J. B. Bradie, President & CEO]

I mean, Andy, not really. I mean, we're typically a services business. As you know, we're not really -- I mean, from an inflationary point of view, we did a midyear review across the business in terms of salaries and things, and that's all built into the numbers today. I think our retention and recruitment and numbers are leveling out somewhat. And so recruitment is keeping up pace, even though turnover was probably a bit higher than it was a year ago, but we've addressed that. And we're a provider of labor typically. So we're not seeing any real impact of the supply chain piece on what we do. And I think the other question is really around FX and interest rates. I think Mark addressed them. I think our treasury and Mark and the team have done a terrific job of actually mitigating those risks somewhat, and the international businesses continue to outperform. It also helps, of course. So I think some -- perhaps others are feeling greater headwinds in those areas than ourselves. And so I think that encourages us to be very positive on this call with the outlook.

[Andrew Kaplowitz, Citigroup]

Got it. And then just following up. I know you said STS is on target to achieve $200 million of EBITDA this year. Can you give us more color into what you're seeing in the business, it seems like cyclically, secularly, you should have a nice tailwind, but I think you were flattish in the quarter, a little bit behind in sort of that double-digit revenue growth, so what are you seeing? And then maybe any initial views on the Inflation Reduction Act and what it could mean for KBR?

[Stuart J. B. Bradie, President & CEO]

Yes. I mean, obviously, I think answering the latter part first. I think, obviously, I mean, that puts quite strong tailwinds into the market. In the U.S., we've not done the full assessment of that. But I think, again, as we said, at all points North. And a lot of effort and effort sort of dollars targeted at energy security and climate change, as you're well aware. So I mean that only plays into our key skill sets. It really does. And in terms of what we're seeing across the board, you've got NOCs and IOCs that probably modeled an oil price in the original budgets that are far, far South of where it's at today. So these are incremental dollars that are all dropped to the bottom line, really. And so we're seeing a very cash-rich client base that wants to continue to address, I guess, the energy security issue and the supply-demand imbalance, and they want to gain market share. And so investment is right around the Middle East investment commitments from companies like Aramco and from ADNOC, etcetera are a mess. And they really contain a strong hydrogen component and we thought about not burning crude oil for energy and transitioning away from that and then taking crude and turning it into chemicals, etcetera.

So a lot aligning with our technology portfolio, a lot of cash being put to work, a lot of market share that others will try to defend. And they're also cashed up, if you like. So I think we'll start to see increased investments across the board. And in truth there has been under investment in this sector for quite a few years now, as you're well aware. So it's -- that you've actually got refiners making margins that they've never made before. So really, that's sort of sweating that asset and making sure the technologies fit the future. And there's I guess, optionality, again, plays to our capability. And then you've got the chemicals companies similarly looking at expanding, particularly around olefins and looking at how they actually expand that marketplace with demand very, very strong.

And then you layer in, of course, the whole sort of hydrogen future and the fact that the blue and green hydrogen is very much on everyone's shopping list. And of course, you can see the book-to-bill of our technology and STS businesses, as a consequence, is very, very strong. So it's almost a perfect storm and not only from a demand cycle, but actually the ability to pay for projects. And we're seeing that across the board. And there's an urgency to this that we haven't seen for a number of years. And so we're seeing a lot of uptick in opportunity set across that business, which is why I was very upbeat about it in my prepared remarks and probably less conservative than my normal self around that. But it's a super market, and I think the award of VG as well really sort of shows that the energy security piece, it's real, that VG have already announced sales of LNG, the first company to do so to Germany. So -- and there's probably more to come in that cycle. So I think it certainly gives a very strong medium-term outlook, not one year, but a number of years.

[Andrew Kaplowitz, Citigroup]

Appreciate all the color.

[Operator]

Thank you Andy. Our next question today comes from Jamie Cook of Credit Suisse. Jamie, please go ahead.

[Jamie Cook, Crédit Suisse]

Hey, good morning. I guess two questions. One, Stuart, as I think about you guys today versus, I don't know, two years ago, five years ago, the business model and the portfolio is obviously a lot different, lots of concerns out there about a recession in the U.S. and Europe. But can you talk about how you think about the earnings resilience of KBR if we do go into a recession, just given some of the visibility and the backlog you have, do you think there's still opportunity to grow your earnings as you're thinking about the next sort of 12 to 18 months? And then my second question, Mark, I'd just update obviously, the cash flow in the quarter was strong, the balance sheet's in a good position, we're doing sort of sort of niche acquisitions, how are you thinking about your capital allocation priorities, any larger M&A opportunities? Thank you.

[Stuart J. B. Bradie, President & CEO]

Thanks, Jamie. I mean, obviously, as we look at our strategic planning, not just this year, but every single year, we look at the resiliency of our earnings portfolio and whether that's actually political, geopolitical, or economic. And I think we've positioned the business very -- the businesses very nicely in areas that will continue to be funded and we could be -- continue to be funded through really any disturbances that I mentioned earlier. I mean if you think about energy security, that issue is not going away. If you think about the resiliency of moving the agenda from a climate change perspective and the commitments that are already being undertaken that are multiyear commitments, LNG being -- the VG thing being a perfect example, it's not a one year, it's a three, four-year program. So I think the resiliency around that portfolio is very, very strong.

And then when you turn to look at Government, I mean, remember, we talk about KBR being very differentiated because of the length of tenure of our contract portfolio. And this is the time where people need to actually think about that and understand why we've done what we've done and really the resiliency around that and the length of tenure, not for one year, but I think the average tenure is 10 years and our contracts portfolio is extremely, extremely important at providing, I think, our shareholders and our people with confidence around the resiliency of the business. And to top that off, I think we've actually positioned the business in areas that will continue. I mean, the threats, or near-peer threats of Russia and China are not going away, regardless of any recession or potential recession. And therefore, I think continued investments in the areas I discussed in my prepared remarks will continue. So I mean -- so I think we're very, very well positioned to be resilient through any potential recession. And I think we've done that very purposely. And I think we've been very thoughtful around that and try to articulate that on a number of occasions to the market. And hopefully, that now resonates. And Mark, the second question?

[Mark Sopp, EVP & CFO]

Yes, Jamie. Good morning to you. Look, we have a great balance sheet today. We've worked very hard to achieve that, and we want to keep it that way. And we are in a situation where we're not sure where the interest rates are going and the magnitude of that, and we don't want to be overly speculative either. So I did say earlier that we tend to be cautious in deploying capital. We intend to continue to be balanced. We obviously just did VIMA this morning. That was done at an attractive valuation. I think we would continue to be constructive for modest-sized acquisitions at attractive valuations, but we also have a view there might be better pricing later in the event of a recession. And we'd like to have some dry powder available for that. So with respect to that, we'll be more cautious than usual on the M&A front.

[Stuart J. B. Bradie, President & CEO]

Yes. I think -- I mean, it's interesting with these bolt-ons, Jamie, we call them bolt-ons, but they're actually very strategic for us. And I mean, digital transformation is obviously a key theme running through much of what we do. But the multiple we pay for that business was circa 10 times, and it's a business that's growing mid-teen CAGRs and with margins in the high teens and low 20s. I mean, if you put that in context of what you can achieve in the wider market today, that's a really, really attractive deal. And Mark's right, I think the heat will come out this market a little bit. Some people who are over levered may get themselves in trouble with higher interest rates and may not be as resilient to recession. And it'd be nice to be able to pounce, if you like, when the time is right and assets are perhaps a little bit more affordable in the U.S. and in the broader context that are more sizable, for example. So that's kind of where our thinking is today.

[Jamie Cook, Crédit Suisse]

Appreciate the color. Thanks a lot.

[Operator]

Thank you Jamie. Our next question today comes from Tobey Summer of Truist Securities. Tobey, over to you.

[Tobey Sommer, Truist Securities]

Thank you. If we think of the space domain for a company of your exposure to NASA and military Intel, how is the growth there compared today versus the overall GS segment and what's the relative growth outlook compared to the GS segment on a go-forward basis?

[Stuart J. B. Bradie, President & CEO]

Yes. I mean it's a good question, Tobey. Lots of discussion, a lot of excitement about space across, obviously, the NASA side with the increase in budget and the commitment to go to the moon and beyond. You see the changing contractual structures coming through NASA with this greater commercialization and that sort of symbiotic relationship, if you can get it right between government and commercial. And then you start to look at, obviously, the broader commercial space implications, and that is a growing part of our portfolio. And then, of course, the military space and Intel space side, which of course, has got a far greater level of investment in it today than it's ever had. But what is, I guess -- and that comes through, obviously, our D&I segment. And we're seeing very good pickup in awards across that business in Q2 is those contract vehicles like iMax and things actually do their stuff.

The bit that is slow is NASA award. And we did pick up our GSMO recompete, which actually was quite quick, but we have multiple billion dollar awards sitting in that arena. And I think as a consequence of that, our revenue profile has been fairly flat this year, year-on-year in science's space. Our performance has been terrific. So the margins are up, which is exactly what we want. And so I think anything we win having want to recompete anything we get between now and next year, will actually increase the cadence of growth across that segment. But the timing is difficult to predict. And I think that's the key piece of this. But we are pretty confident when you roll in the whole space piece, the D&I piece and, of course, what we're doing in -- sustainment. And importantly, GSI, an international realm, that our overall growth targets are achievable in GS through to 2025.

[Tobey Sommer, Truist Securities]

Thank you. And my follow-up is, are you investing to grow your bid and proposal teams in the Government Solutions area to prosecute what means well an opportunity for it [Technical Difficulty]. And if so, what level of growth in those teams or investments are you luring?

[Mark Sopp, EVP & CFO]

Tobey, Mark here. Yes, we are increasing it to a modest degree. It does ebb and flow with specific bids and proposals, as you'd expect, to some degree. But we've built a good team. When you make acquisitions, you tend to take the best and brightest out of all of them and combine them and go after things you couldn't go after before. I think we've done that well. I still think we're in early innings on that. And as we go up the food chain and up in scale, it will require more investments. So we have that baked into our long-term plan. Organic growth is the best type of growth, obviously. And so those types of investments often pay off, and that is definitely in our sights to make sure we leverage that as much as we can.

[Tobey Sommer, Truist Securities]

Thank you.

[Operator]

Thank you Tobey. Our next question comes from the line of Gautam Khanna of Cowen. Gautam, over to you.

[Gautam Khanna, Cowen and Company]

Hi, good morning guys. I was wondering if you could update us on two things. One, the timing and sort of the circumstances around the HomeSafe Alliance win. And if that's still on track for an October resolution and what you can say there? And secondly, in the past, you talked about the Eurocom business seeing about $100 million of task orders related to the escalation Russia-Ukraine. I was wondering if you could update us on what that might look like this year and next in terms of revenues? Thank you.

[Stuart J. B. Bradie, President & CEO]

Okay. So I'll take the first one, and maybe, Mark, the second. I mean, the HomeSafe process continues to be on track. We haven't heard anything that would give us any concern that this is not happening in the time table we laid out earlier, so in October. You'll recall, we do have our transition, our 9-month transition and how all that bears out. Once we get awarded, we'll come back and give you an update. But so far, no change, Gautam, on that.

[Mark Sopp, EVP & CFO]

And Gautam, on the UCOM, I believe it's your second question, and our support relative to the UK and Russia affair, well positioned there in to LOGCAP V, as you well know there's the normal activity and then there's the plus-up growth relative to supporting those activities. So far this year, it's up about roughly $100 million over its normal pace, and we expect that type of pace to continue through Q3. It's a little hard to tell after that, and we've been very cautious after that, in our view, as -- we suspect we'll be there for a long time, but it's hard to say with looking at contracts and specific guidance from the customer. So we're cautious on that front.

[Gautam Khanna, Cowen and Company]

Thank you.

[Operator]

Thank you Gautam. Our next question comes from Bert Subin of Stifel. Bert, over to you.

[Bert Subin, Stifel, Nicolaus & Company]

Great, thank you and good morning.

[Stuart J. B. Bradie, President & CEO]

Hi Bert.

[Bert Subin, Stifel, Nicolaus & Company]

Stuart, Mark, if you -- a lot of what you guys have been talking about sort of confidence on the couple of the businesses within Government Solutions. If I were to parse them out and say, LOGCAP, the international government services franchise and space, and you had to choose, which would you say is going to grow faster as you approach those 2025 targets?

[Stuart J. B. Bradie, President & CEO]

It's almost an impossible question to ask. I think that the D&I business has had fantastic organic growth. If you looked at it last quarter, just from its cadence and when things are awarded, I think if things come through, NASA this year, you'll see quite nice growth coming through the Space business. But as I said, it's unpredictable. The RNS LOGCAP business, Mark said, it's quite difficult to predict. And GSI continues to perform nicely, without pace, sort of 10% CAGR. So I think the beauty is the portfolio. And I think the confidence our shareholders and the market should take from that is the continued performance at or above expectation. And every quarter, one of these segments does a little bit better than the other. Now they're all performing very, very well, as Mark said. But someone will outpace the other on a quarterly basis, just on time of awards, resolution of award fees or contract closeouts or whatever it might be. So I think at the end of the day, I think that's the piece that's more important. And we've laid out what I think are very realistic growth targets. And that hopefully, the market is getting more and more comfortable on achieving those as we head through each quarter. So I think that's probably the best way to answer it rather than to -- it's a bit like saying, "Who's your favorite child?" I mean, and you just don't do that, right. And so we're not going to. And I think that ultimately, the portfolio is the strength.

[Bert Subin, Stifel, Nicolaus & Company]

Fair enough. And just a quick follow-up, thinking about the other side of the business, STS. If I look at the components of that business, you have the ammonia syngas, you got recycling, petrochemicals, inorganics, and some of the energy refining. And obviously, you highlighted a pretty sizable deal in the energy refining side. How should we think about the other components, clearly, we're in a position right now where fertilizer is in short supply, but you're not hearing a lot about capacity being built out, you've highlighted Mura for the recycling side, but just in the context of the European energy crisis and a lot of things going on globally, how should we think through some of the other components that get you on those growth targets?

[Stuart J. B. Bradie, President & CEO]

Yes. It's kind of a similar answer, I think. Our portfolio is the strength. We have 70-plus technologies. And I mean, I think we're seeing a huge amount of activity and hopefully, some -- we'll see some positive movement there in the ammonia side. We've announced a number of green and blue ammonia this year. There's a lot that we're bidding right now. There's a lot of traction in that area. And I think maybe you're not seeing as much as maybe you expected, but there's certainly a huge amount of activity in that ammonia segment for us. We're seeing a huge uptick in olefins and opportunities around olefins, as I explained in my prepared remarks. And then you've got the whole hydrogen piece coming through, which again is related to ammonia, the blue and green cycle of that and the continued investment in those areas. So it seems to be -- again, every quarter, depending on the timing of awards, one seems to win out over the other. So we're seeing, obviously, investment in traditional. We're seeing to get companies time to develop renewables. We're seeing refiners spending cash to keep their assets and improve, what I would say, optionality in terms of moving away, particularly from transportation fuels and looking at other options there. And we've got new technologies to help them with that. So we're seeing a lot of activity, more so in North America today than we've seen for many years, which is not unexpected, but also across the rest of the world. So I think it's -- again, it's not one segment over another or one technology over the other. I think it's a portfolio response question. And we actually feel pretty bullish about things like ammonia.

[Bert Subin, Stifel, Nicolaus & Company]

So just to clarify, you're not expecting a material negative impact from what's going on in Europe or is that just something you're monitoring right now?

[Stuart J. B. Bradie, President & CEO]

We do not expect a material impact to what's going on in Europe and other than an increase in demand because of energy security. It's a material impact on the -- if anything, on the upside. But we've laid that out in our targets already.

[Bert Subin, Stifel, Nicolaus & Company]

Thank you Stuart.

[Operator]

Thank you Bert. Our next question comes from Manu Close of Vertical Research. Manu, over to you.

[Michael Dudas, Vertical Research Partners]

Hey, I think it is Mike Dudas. [Multiple Speakers]. Good afternoon gentlemen and Alison.

[Alison Vasquez, VP, IR]

Hi Mike.

[Michael Dudas, Vertical Research Partners]

So I won't ask you to predict the winner of the UK Prime Minister race. But since you're over there and you've been certainly adding a lot of assets and talent to grow that part of the business out of the UK, can you give a sense of your -- given the politics and given what's going on, I would assume that budgets and opportunity is very strong over there, I just want to see if you would agree?

[Stuart J. B. Bradie, President & CEO]

Very much so. I remember, it's not a change of party. It's just -- it's a change of leadership in the conservative party, and their commitment to defense spending is clear and that budget has been set. Unlike the -- I mean the U.S. does this an annual cycle as the UK does three to four-year commitment. So it's the very different regime. So we're feeling very confident about our spend. We're feeling really good about the commitments of the UK and others, in fact, to support the war effort in Ukraine. And we've got the whole dynamic, which is a little bit different in the UK around Brexit, where it has to be -- UK has to become more self-sufficient. And as a consequence of that, the activity levels going on with Frazer-Nash and VIMA, etcetera, are heightened by those factors.

[Michael Dudas, Vertical Research Partners]

Appreciate it, thanks.

[Operator]

Thank you for your question Mike. We'll now move over to our next question from Avi Jaroslawicz of UBS. Avi, over to you.

[Avinatan Jaroslawicz, UBS]

Hey, good morning guys. On for Steve Fisher. I guess just on those NASA awards being -- are they more sluggish now than they've been in the past and you also noted that they're rather unpredictable. Wondering if you can just help frame that in terms of kind of a range of timing, like does that mean a window measured in months, quarters, possibly a few years, any color there would be helpful?

[Stuart J. B. Bradie, President & CEO]

Yes. So I think the problem is it is unpredictable. I mean, you've got the GSMO contract, which we bid and was awarded in fairly short order. It was not protested and we move forward, which was terrific. You had the Mossy contract that we bid, we won. It was protested. We bid again. And four years later, it's now under evaluation. And hopefully, we'll be awarded later this year. And we've got some that are being in the machine, if you like, within NASA for over a year. So just waiting for award. And I think it probably relates to different centers, different resourcing, different priorities. It's tricky to tell. And I ask our people the same question, and we don't really get -- I mean that's just the sort of answer that we get.

So yes, I mean I think the nice thing to take away from that is that our risk of not doing what we said we do is actually very low. We've won our largest recompete of the year. Anything we win is additive. We won the Spacesuit Program, as we discussed in my remarks, and everything that comes through between now and the end of the year is just a positive impact to the 2023 story. I think the performance that we are having really helps us in terms of not just margins and returns but also position us well for recompetes, because you don't get strong award fees unless you're doing really, really well. So I think that all plays well, and we will see things moving as time progresses over the next six months to the end of the year. And I suspect the cadence of awards will pick up a little bit as well as more people get back from COVID and things like that.

[Avinatan Jaroslawicz, UBS]

Got it, thanks for that. And maybe as a follow-up here, just how should we be thinking about the backlog in STS from here, do you expect to be able to sustain at these levels or maybe wind it down as some of these bigger programs burn?

[Stuart J. B. Bradie, President & CEO]

Yes. I mean I think -- I mean, the nice thing about announcing a $1.5 billion win in that arena is that it enhances your book-to-bill. The challenge is then continuing with that. But I do think that the market is supporting continued momentum in that arena. I really do. So I'm not saying that we're going to be struggling. I think the opposite. I really think that the market is hot. I think that our position in the market is really, really strong in the areas where we want to play. And we don't want to play everywhere. And I think that's key to our success also. So I think being focused, being smart around the work that we go after and why and the earnings profile and cash profile of that work will continue to be front of mind. So no, I don't think there's too many headwinds there.

[Avinatan Jaroslawicz, UBS]

Understood. Appreciate the color. Thank you.

[Operator]

Thank you. This concludes the Q&A portion of today's call. And I will now hand back to Stuart Bradie, President and CEO, for final remarks.

[Stuart J. B. Bradie, President & CEO]

Thank you. I mean I think just a short thank you. I think, some excellent questions over the last hour or so. And thank you for listening. And obviously, we'll be talking to you further over the course of the next day or so. Thank you.

[Operator]

Thank you. This concludes today's call. You may now disconnect your lines.