KBR Inc

NYSE:KBR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, all. I would like to welcome you all to the second quarter 2023 KBR Earnings Conference Call. My name is Brika, and I will be your moderator for today's call. [Operator Instructions] I would now like to turn the conference over to your host, Jamie DuBray. So, Jamie, please go ahead when ready.

[Jamie DuBray, Investor Relations]

Thank you. Good morning, and welcome to KBR's Second Quarter Fiscal Year 2023 Earnings Call. Joining me are Stuart Bradie, President and Chief Executive Officer; as well as Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on the Investors section of our website at kbr.com.

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

[Stuart Bradie, President & Chief Executive Officer]

Thank you, Jamie, and a warm welcome to our Q2 Earnings presentation. We've actually got quite a bit to get through today. So let me dive straight in and start on Slide 5, Zero harm. So, we recently issued our sustainability report for 2022. Our ESG commitment and alignment to shareholder value is unwavering. Now we've highlighted a number of key stats on the slide, but I would urge you to read the sustainability report as obviously, there is a lot more than we can show you today. There are a few key stats and some takeaways from them. The value of revenue directly impacting sustainability for our customers across the $2 billion threshold in '22 I think this is a clear indication of increasing alignment with shareholder value as we progress our ESG agenda, I think, a real differentiator for KBR. Now 2022 was our fourth, yes, fourth consecutive year of carbon neutrality, and we will continue with offsets as we head towards our operational net 0 target in 2030. There are a number of external recognitions on the right-hand side, some of which you have seen before, like Fortune's most admired companies and Forbes top female-friendly companies but in addition, we were recently recognized by EcoVadis as a gold standard sustainable company and by USA today as a climate leader this year.

And this quarter, which we did announce, we achieved MSCI's highest ESG rating of plea, all of which we're very, very proud of but all of which we could not have achieved without the commitment of our amazing people, so a big shout out and thank you to them. So on to Slide 6, and business health. On the people front, we've increased our overall headcount through the end of June by 18%, 18% year-over-year. And this is not the only measure, but I think it's a solid indicator that our talent acquisition investments are working and that our businesses continue to grow. As we're now in summer and with the extreme heat across the world, don't we know it, it's timely we update you on our future talent and intern programs. KBR offers summer internships to hundreds of students each year with full-time offers ultimately extended to the majority of candidates which is a good fact, I think. We recruit these students through university partnerships. In fact, we have over 150 universities across the world that we partner with, including minority serving institutions to obviously encourage minority participation, support our diversity efforts and, of course, foster inclusion.

Once students graduate and join KBR, we provide an early career rotational program, which is actually full time for two years that consists of four rotations and importantly, including one international rotation and this happens both in the business and the functional areas. And we've seen great success with these programs thus far, and they really continue to bolster our talent pipeline, which I'm sure you will agree is very important. Now moving to Zero harm on the top right. We've covered a number of key points already, but I'd just like to highlight that our safety performance this year continues to be top quintile. And this is all about looking after our people. And as I've said many times before, good safety is, frankly, good business. So, another shut out to our people who continue to deliver every single day. Now moving to business growth. Bookings across the group were pleasing with a trailing 12-month book-to-bill of 1.1 times. Now this resulted in an increase to backlog to $21.1 billion, which I believe is a strong reflection of converting our pipeline, which really remains attractive across the segments. With no big awards in the quarter itself, this once again shows the resiliency of our business model.

For 2023, we now have over 90%, 90% of the work required to deliver on 2023, quite a feat at the end of June. And another good indicator, I think of the resiliency and the predictability of our business model of our outlook and ultimately, our targets. Now on to the high-level financials, our revenue grew in line with our targets at 8%, and that's even higher ex OEW, but with an associated operational EBITDA growth of 16%, 16%, terrific. And you may recall, we sold some noncore assets, some legacy investments in roads in the U.K. and a U.S. property in Q2 last year, which we have adjusted out. So, you can see the true operational performance year-on-year. This clearly reflects the increased margin performance across the business but in STS in particular, and the impact this is having at the group level. Cash performance was terrific after a typical sluggish start in Q1 and we are at 147% conversion year-to-date, again, absolutely outstanding. We continued, in fact, we up to bet our share repurchases and coupled with dividends we returned $95 million to shareholders in the quarter for a total of $172 million in the first half of '23. I'm also very pleased that we retired the remaining legacy issue from LOGCAP III, which removed a sizable legacy risk and gives certainty of outcome, which we're very pleased with.

As you know, we said we would seek to settle the convertible note and avoid dilution this year. And in the quarter, we made a formal election to settle the convertible notes in cash. Now in making this cash election and partially retiring the convertible notes and note hedge, we triggered an accounting impact, which caused a special charge of $314 million and that hit the P&L this quarter. A distinct derivative accounting. So, Mark will cover this in detail in a moment, but the technical accounting for the convert notes does not change the underlying economics of how we settle the maturity with a minimum impact to KBR. And this chart was adjusted out of our results and appropriately. Now in addition to the cash election, we extinguished almost 30% of our net liability this quarter. So, getting a good chunk of that obligation behind us while maintaining a strong balance sheet and leverage, so a great outcome. In short, we've had a terrific first half to '23 and we will be raising our EBITDA guidance accordingly, and Mark will cover that later.

Now on to Slide 7 and a few words on our key markets. Firstly, sustainable technology continues to outperform, not just in financials, but in bookings, as we continue to leverage the energy trilemma. We've talked about that many times. And taking advantage of these market drivers we discussed last quarter, resulting in a book-to-bill of 1.04 on a 12-month basis, a real solid indicator for future earnings. Backlog pushed across the $5 billion hurdle and is a great indicator for our continued momentum. The quality of work we are winning is really impressive, and we've highlighted three on the slide that are firmly in the energy transition space. We have a strong capability in lithium that we acquired a few years ago. technology and know-how focused on lithium extraction that has been expanded upon as we look to the next-generation battery technology with ISU Chemicals. After a number of ammonia awards last quarter, we were again pleased to announce that Avina Clean Hydrogen has chosen KBR's Green Technology Solution for its green ammonia project. This is a 2,200 tonnes per day plant, so very much at scale, so very exciting. And finally, in the green refining area, Hindustan Petroleum has chosen our ROSE Technology, we've talked about that many times. And I think this really just demonstrates continued activity in this area.

Now on to Government Solutions. Obviously, the highlight for the quarter, which was in everyone's mind was to get through the debt ceiling process. Our award of large contracts still remains fairly slow, and awards we think will come through a bit lumpy and are somewhat difficult to predict as the year progresses. Spending priorities, as we highlight on the slide and have discussed previously, are very much in our wheelhouse. And as per last quarter, I would highlight the resilience of our business model with our book-to-bill in the quarter of 1.0 and on a trailing 12-month basis of 0.9x. And this has been achieved without a significant award in the quarter, so a highly resilient and agile business model. However, in saying that, as you've seen in July, we now have been awarded the IMOC III contract by NASA, which will come through in our Q3 numbers, which is significant. As you're aware, we have a conservative booking policy, and we do not book awards under protest. So also in Q3, we should hopefully see a resolution of the OS three and the CS two contracts, which are both under protest. Both of which you're well aware of. So Q3 is actually shaping up to be one of those positively lumpy bookings quarters. So quite very exciting.

So there are a few highlights in the quarter on the bottom right. On IMOC III, the value has gone up quite a bit. And like most large NASA contracts, it has a long period of performance that we run for five years base with four additional years in auctions, so nine years in total. And IMOC III is also strategically important as the work not only covers the international space station, but has an increasing focus on Artemis and in Orion as we return to the moon.

And sticking to NASA, it's worth highlighting the mission integration contract that we secured, working with a small business. Now we view small businesses as strategic stakeholders, and our teams have fared some really strong and trusting relationships that have not only resulted on contract wins like this one, but we have also been recognized by our customers for excellence in small business utilization, which I think is very important. Strategically important, we expanded our best operations presence securing support services in the Indo-Pacific. This is an area of increased focus and presence for the U.S. military and of course, focus into the future.

I will now hand over to Mark.

[Mark Sopp]

Okay. Great. Thank you, Stuart. I'm going to focus on our core operational performance upfront, where we did have terrific results, and then I'll address the legal charge and the technical accounting charge on the convertible notes and then finish up with guidance. So with that, I'll pick up on Slide 9.

The core operational numbers really continued to trend well in Q2, as you heard from Stuart. Our agile, diversified, and global business model has consistently delivered growth as we are able to tap opportunities in the evolving markets we serve. Top line was up 8% and even a little more ex OEW with contribution from both segments. As Stuart mentioned earlier, EBITDA growth in Q2 was even more pronounced, registering at a strong 16% in the quarter, excluding the gains from disposal of nonstrategic assets we had in Q2 of last year. Both segments also contributed to the strong EBITDA growth, and it's also true margins at the consolidated level are continuing to improve as STS is covering a bigger portion of the mix.

Adjusted EPS on the same basis was up double digits at 16% for all the same reasons, and actually a little ahead of our plan for the first half of the year. However, as you would expect, with higher interest rates, our election to accelerate paying off some of the convertible notes maturing later this year and with the legal settlement recently announced, interest expense will grow quite a bit in the second half. This increase will counterbalance the growth in EBITDA we are seeing from operations, which plays into holding our forward EPS guidance steady. We think all things considered, that's a good outcome given the risks we're retiring. More on this in a bit.

Adjusted EBITDA and EPS excludes two significant nonrecurring charges worth discussing a little bit more here. The first is the $144 million pre-tax charge to settle the LOGCAP III QUI TAM case that we announced on July 3. This was excluded from adjusted EPS as it represents a legacy item from about a dozen years ago.

The second is for the $314 million accounting charge, Stuart covered that earlier, related to actions we took to settle our convertible notes in cash and also the early retirement of $100 million in principle of such notes. I'll cover this in more detail shortly in terms of the accounting treatment, but it's important to note that due to the nature of these charges and as confirmed with our bank group, both of these will have no adverse impact on our EBITDA for credit borrowing base purposes and for covenant compliance purposes and thus, they will have no impact on liquidity. Big point. At the same time, both of these resolve or mitigate risk going forward, which is a positive.

Over to cash. Cash flow from operations was really strong in Q2 over $250 million. with year-to-date cash conversion of almost 150% of adjusted net income. So hats off to the teams across both segments for strong performance, negotiating smarter commercial terms strong client collections and also other aspects of working capital management, which were spot on.

Now I'll move on to Slide 10 with more details on the two segments. STS continues to have just a stellar year with revenues up 32% and EBITDA production up 45%, all organic. As Stuart covered earlier, strength in STS is well balanced across demand for energy transition and also energy security with clients increasingly trusting KBR to help drive decarbonization solutions all around the world. EBITDA margins were 20% for Q2, again, aided by strong licensing mix and also increased activity on our joint venture projects.

For Government Solutions, revenues were up 6% on an ex OEW basis, good growth there. Our team continues to demonstrate ability to drive on-contract growth across its diverse book of business, which is a real vital important strength for KBR. International contribution and strong performance-based fees helped drive margins up to 11% in Q2, which obviously complemented the strong STS margins for an excellent quarter overall in terms of profitability.

Now on to Slide 11 on capital and cash flow matters. With dividends being increased earlier this year and with buybacks, as Stuart said, $95 million was returned to shareholders in Q2, which together with Q1 amounts to over $170 million for the first half. In addition, as previously announced, we used about $200 million to accelerate the maturity of about 30% of our outstanding convertible notes and the associated note hedge and warrants. We did this to contain the overall cost of the maturity in the event we continue to see growth in our stock price as the year progresses. Having deployed this amount of capital, it is indeed notable, our leverage ratio just nudged up a notch from 1.9 last quarter to 2.0 this quarter. attributed to the strong growth we had in EBITDA and also the strong cash flow production in Q2.

Now let me shed some light on how we see our capital position evolving in the next couple of quarters. While we took the P&L charge for the legacy legal settlement in Q2, the associated payment actually went out the door in Q3. So that will be reported in the third quarter. After that event, we have to deal with what remains of the convertible notes and the note hedge and those associated warrants. As reported and publicly filed transaction documents, the maturity of the notes and the note hedge is November one of this year, whereas the warrants mature between February and May of next year. At a $65 stock price assumption, the aggregate net value of the amount that remains outstanding across all three of these instruments as approximately $500 million. This, of course, will flow with any changes to our stock price. About half of that $500 million value is attributed to the convertible notes and the associated hedge again maturing November 1, which we've elected to settle in cash. The other half is attributable to the warrants, which may be settled in cash or shares, and we'll make the decision on those two methods later this year.

We'll, of course, pursue maximizing free cash flow to fund these needs, but do expect borrowings to increase and thus have provided more interest expense in the outlook for the rest of this year. So I'll hit that in guidance here in a moment. Now let me touch on the accounting treatment for the convertible notes and note hedge. And indeed, the new rules on derivatives and hedge instruments do make this particularly complicated, so please bear with me.

We said in prior calls, we intended to settle the convertible notes and note hedge in cash and in April, we made the required election to ensure that outcome. That election triggered different accounting treatment for the convertible notes and the note hedge. Previously, the notes and hedge qualify for equity exemption under accounting rule ASC 815 on derivatives and hedging because share settlement was an available option.

However, once the cash settlement election was made, the convertible notes and note hedge no longer qualified for that exemption and consequently became subject to fair value measurement on the date we made that election. Oddly, the new rules apply this fair value treatment differently for the convertible notes on one hand and a corresponding hedge on the other. We are required to expense the fair value of the notes in the P&L and over quarters 2, 3 and 4 of this year until they mature.

Whereas the economic benefit delivered by the hedge, is recorded to equity. That means the P&L does not reflect the economic benefit that the hedge truly delivers. That's the odd part. So as a result of all of that, we recorded a noncash charge in the P&L of $314 million related to the convertible notes and will also record an additional noncash charge of $152 million spread out over Q3 and Q4 of this year to reflect this accounting treatment I just summarized. So that sums it up.

Let me just reemphasize the underlying economics to resolving all three of these elements of the convert are not different than what we have previously communicated. Our approach to resolve the whole matter remains as stated. And again, the accounting charges do not have any impact on our liquidity. So they do distort the P&L pretty significantly. But bear in mind, we're continuing to do, as we said we would do. get past this and maintain strong liquidity throughout and do so with minimal impact to KBR. So that's certainly our commitment.

Now thanks for bearing all of that. I'm going to move on to our guidance on Slide 12. We Revenue guidance is unchanged at $6.9 billion to $7.1 billion for the year. However, with a strong operational performance in the first half, we are bumping up adjusted EBITDA to $730 million to $750 million. Our adjusted EPS guidance is unchanged at $2.76 per share to $2.96 per share.

In short, the outflows for the convert and the legal settlement are considerably more than we anticipated at the start of this year and borrowings to cover those amounts are driving up interest expense that are offsetting the improved profit production we see from our operations. And finally, our adjusted operating cash flow guidance is unchanged at $425 million to $460 million, and that excludes the Ketan legal settlement as it would otherwise truly distort the cash flow performance that the business is producing.

So summarizing this, the core business is performing really well, and we're increasing the outlook for production of operating profit from the business, a great testament to the performance of both STS and GS. This strong performance allows us to retain our adjusted EPS at the same level that we set out at the start of the year despite increased interest costs from higher rates, the interest associated with resolving the legacy matters and managing the convert as we've sat here and all doing so at a significantly higher stock price. So all things consider a remarkable story of positioning the business to tap attractive markets, generating strong cash flows and clearing the way with fewer constraints going forward.

As we generate attractive levels of cash flow in future quarters, we expect to conduct a combination of buybacks, debt reduction and M&A to stay on course of our long-term targets, which we remain confident in achieving. With that, I'll turn it back to Stuart.

[Stuart Bradie, President & Chief Executive Officer]

Thanks, Mark. Great job. And on to Slide 13, on last slide for today. At a high level, the business continues to operate really, really well. which has, of course, resulted in an adjusted EBITDA guide increase. Better business mix and margin performance has offset increased expense from external factors mainly interest expense. And I think that's a key takeaway today. Winning the right work has been a cost systematic for KBR, and this continues with solid book-to-bill. A good indicator of our end market buoyancy and our business model resiliency.

Q3 book-to-bill, as we talked about earlier, is already looking strong with the IMO award. Work under contract is above 90%, a great Q2 takeaway. So the focus now is about delivering for our customers, it's about cash, which was actually excellent in Q2 and, of course, positioning for a strong 2024.

MSCI AAA rating, I believe, is a direct reflection of our continued ESG progress and our sustainability commitment. And I will finish, as Mark did, reiterating that our long-term 2025 targets remain firmly in our sights. There's been quite a bit of noise out there around interest cost versus buybacks, et cetera. But as long as our business meets expectations and delivers strong free cash flow, which it has done historically, -- we're very confident on the 475. Thank you very much, and I'll now hand back to the operator who will open the call for questions.

[Operator]

[Operator Instructions] We have the first question on the line from Sean Eastman of KeyBanc Capital.

[Sean Eastman, KeyBanc Capital]

I wanted to dive in on GS a little bit. I mean in the last couple of quarters, we've talked about how STS is running two years ahead of the 2025 plan. But just with the strong on-contract growth, GS is seeing the larger frameworks yet to be put in the backlog. How are you guys feeling on the GS component of that bridge to the 2025 target?

[Stuart Bradie, President & Chief Executive Officer]

Thanks, Sean. Good question and good that we get a government question first rather than STS, which has been the trend recently. I think we're feeling really good about it. The -- I think the resiliency of the business model we've reflected on last quarter and this. And I think that's the proof of the prudence in the hearing, which is in the book-to-bill. So that's really strong. And we're seeing, of course, the award of IMOC III and these protests shaking out in Q3, hopefully, which will really start to drive additional revenue as we head into and also, we haven't talked about this on the call, but the work on Homesafe continues to go really, really well. And so our expected to sort of ramp up on that as we start some of the early work on deliveries and things to make sure that we're all set running into '24 is going to plan. So we're feeling really, really strongly about the guide we've given for GS and actually achieving the revenue growth we set out.

[Sean Eastman, KeyBanc Capital]

Okay. Excellent. And if I'm being honest, my eyes were glazing over through most of Mark's prepared remarks today. But I guess -- yes, I guess, I guess the way I would approach the question is just as we're thinking about the bridge to 2024, how should we contemplate the kind of year-on-year interest expense headwind? And how does the share count look next year versus this year? Maybe that's the best way for me to make sure I've got this right in the model?

[Stuart Bradie, President & Chief Executive Officer]

Yes. Well, I'll let the person who you to sleep answer that question, but in more detail. But I think we both reiterated our commitment to the $475 million a month around generating free cash flow to be able to buy back to get there. But Mark, over to you.

[Mark Sopp]

Yes. Well, look, we had a lot of fun with the accounting this quarter. So, we wanted to share some of that with all of this but did try to simplify it to the best we could. I want to say something relative to your last question on GS. We kind of take it for granted that margins are somewhat fixed in GS, but they're not. You really have to perform every day on programs. You have to earn incentive-based fees that really are driven by very quantitative performance by a lot of different folks in the government. And time and again, our group delivers just incredibly strong contract performance.

They get great award fee scores, and cranking out 11% quarter. Well, this quarter, the quarter is more like 10%, but that's just really great performance on our projects very consistently, and that's been the case for a long time. So just hats off to them on that. And when you do that, you win recompetes and you win on contract growth and it all is interrelated. And that just shouldn't be missed. On bridge to '24, and share count and interest, the interest is pretty much up dollar for dollar for the increase in EBITDA that we guided to today for this year. It's too early to tell how we'll guide interest for next year will depend on what the Fed does, and it will depend on how we manage the capital structure.

There may be opportunities for new capital that's maybe cheaper than something that's available today. So, I think we need to just focus on running our business, executing our contracts, generating cash and then juggling between buybacks and debt reduction, which we'll do assertively to be committed to maximizing the returns for KBR and marching towards those targets. But I just think we'll have to give you more guide later on that as the capital markets develop.

[Sean Eastman, KeyBanc Capital]

Okay understood. I'll turn it over. Thank you very much guys.

[Operator]

Thank you. We now have Bert Subin, Stifel.

[Bert Subin, Stifel]

Stuart, I guess I will shift it back to STF since that seems to be the topic to your STF continues to outpace expectations pretty handily and presumably the better global economic outlook will help that trajectory as we think through the rest of there seems to be a pretty wide range of expectations for how STS is going to do in '24 if the economy does slow. Just curious if you have any thoughts on sort of how you're assessing the economic sensitivity of the business. And do you still see that low double-digit growth over time as appropriate? Or do you think some of that strength was pulled forward by moving the EBITDA guide up?

[Stuart Bradie, President & Chief Executive Officer]

No. I think as it sits today, I think that sort of low double digit is appropriate in terms of where we're thinking we can take the business. And certainly, the book-to-bill that we've achieved and the quality of earnings that's being derived from that book-to-bill to support that thesis. I think the overall contribution is ahead of pace as you rightly pointed out, and maybe even going faster than we've described historically. And what that does for KBR is just really helps us on our 2025 targets overall. And so, the way that we think about it is it just derisks the $475 million target as we outperform in EBITDA. And obviously, that $475 million is modeled on a certain EBITDA and I think we're ahead of pace there. And so, I think that all plays well and but we're seeing no slowdown in certainly the bookings momentum of the pipeline in STS. And so, I think that low double-digit growth is highly appropriate.

[Bert Subin, Stifel]

Great. And then maybe shifting back just to a follow-up question on your home safe comments. If we go through the timeline, that made it through the last hurdle, I think, end of last October. The transition period was initially expected to be nine months, but I think Transcom sort of said they wanted to push that out a little bit because of the summer move season. Can you just help us understand what's been happening since last October and sort of what happens from here?

[Stuart Bradie, President & Chief Executive Officer]

Yes. So, lots of work going on, as you can imagine, in terms of system implementation and there's actually testing of those systems ongoing right now. which is going well. We've engaged heavily with the supply chain, as you would expect and starting to work through the commercial arrangement with the supply chain so that's all ready to go for the early moves, and I'm pleased to report that we're in good shape there also. And so, as we head out the busy season, we'll be appropriately ready to start testing the system and executing in terms of real moves. And I think what we'll do is we'll get that working really well as we head to the end of the year so that we start to ramp up in earnest as we move into next year.

[Bert Subin, Stifel]

Thank you, Stuart and Mark.

[Operator]

Our next question comes from Jamie Cook from Crédit Suisse.

[Jamie Cook, Crédit Suisse]

I guess just one question as I think about the headwinds to 2025 targets, I mean cash outflows associated with things that were unexpected or just greater when you think about settling the LOGCAP legacy issue is taking you more money to get rid of the converts. So, I'm just trying to understand, one, what are your offsets to those headwinds because cash flow has to be used to get rid of the converts and the legacy legal issues. And so not as much cash can be used to buy back the stock or M&A.

So, I'm just trying to understand you know what I mean, like the offset there to make us comfortable. And is capital allocation in terms of M&A and share repurchase more of a back half 2024, 2025 opportunity versus the next sort of, I don't know, six to nine months? And then my second question as it relates to the 2025 targets because of all these issues and with the household goods issue in terms of when it starts to go in to achieve the 2025 target, it really seems like it has to all, like the earnings ramp is all very much related to 2025 or it's a significant ramp in 2025, what you mean to get to that your target, if that makes sense. So I'll stop there. Thanks.

[Stuart Bradie, President & Chief Executive Officer]

Thanks, Jamie. And yes, I mean it's a very simple answer to these questions. I think Ultimately, we had a quite a conservative deployment of around just 50%. So, there was headroom and deployment through the '24-'25 period. So, we knew that, and that's why we set it at that level so that we had a little bit and secondly, we are now expecting, as I just said in the previous remarks, more EBITDA. We're ahead of pace in EBITDA. We don't expect that to slow down. And obviously, when you do the max, the EBITDA, obviously, the more achievable the targets and if we have to deploy a little bit more cash, we'll still be well south of our 3.0 leverage target. So again, we're feeling really good about that.

And as I said, we've done the math, and I was pretty clear in my prepared remarks that as long as the businesses perform and which they're guy doing as long as we generate the cash, then we're very confident on the $475 million and sticking by those targets and not using interest or anything else as an excuse not to achieve them, but actually overcoming them by overperformance.

[Jamie Cook, Crédit Suisse]

Okay. But Stuart, it is going to be very much back-end loaded, meaning like to get to the 2025 targets, like as you think about the household goods contract, I mean the ability to use the balance sheet, I mean it's very much a back-end loaded story.

[Stuart Bradie, President & Chief Executive Officer]

I mean I think that's probably correct, Jamie. But you'll see progressive movement towards it in '24. And as we continue with our capital deployment priorities and say it begins to ramp up. So, I think you'll really start to see the signals and believe as we believe that it's certainly within our sights. And as we get to the end of '24, you're right. Remember, this is the last legacy legal issue for us in terms of low cap and so it clears the path to free up capital deployment, and we don't have to be quite so conservative because we don't have such fish to mitigate into the future. So, we're in a good spot. We're firmly committed to these 475 targets and you're probably right. They're probably a little bit more 25 weighted than 24 weighted. But there'll be clarity of path to get there as we progress through '24 for sure.

[Jamie Cook, Crédit Suisse]

Okay thanks, Stuart. Appreciate it.

[Operator]

Our next question comes from Steven Fisher of UBS.

[Steven Fisher, UBS]

Thank you. You guys cited the better business mix as part of the operational upside to the guidance for this year. before that being offset by the interest. So I guess I'm curious, what were the elements of the more favorable business mix? Was that sort of the mix of licensing within STS? And if so, you had a nice amount of bookings there this quarter. What sort of visibility you have to more of that going forward?

[Stuart Bradie, President & Chief Executive Officer]

Yes. I think it's a multiheaded statement in a way, Steve, we did very well in the technology bookings for sure, and there's certainly a lot of activity in that market for that to continue. But in general, STS bookings were very, very strong. So overall, in group margin sense, the contribution from STS overall was increased in the mix. But not only that, as Mark said earlier, the GS business did terrifically well and did very well in award fees and et cetera, coming in with strong margins also. So it was really across the board in terms of the performance of the business.

[Steven Fisher, UBS]

Okay. So I guess, just as we think about the STS margins for the second half of the year. Any particular kind of expectation to sit here? I mean, can we kind of sustain -- are you assuming similar levels to what we achieved in the second quarter based on that mix?

[Stuart Bradie, President & Chief Executive Officer]

Yes. I mean we're -- we have this question, I think, every quarter. And the guide, we said we're trending ahead of that in the high teens, perhaps low 20s. So it's in that ZIP code for sure for the rest of the year.

[Steven Fisher, UBS]

Okay. And then maybe just to follow up on the budget process in the comments you had earlier. Can you just maybe expand on that a little bit? What are the areas that you're most confident in the growth versus those that maybe are still being a bit more debated?

[Stuart Bradie, President & Chief Executive Officer]

I think we're very confident overall. I mean we've got an STS business that's outperforming. I don't think we need to reiterate that too strongly. Our science and space business grew and you'll see this and grew 12%, I think, Mark in the -- and obviously, with immensely strong bookings coming through. So that's going to continue. Our readiness and sustainment business and the continued work in the European theater is also set to continue. And we've got increased activity, obviously, in the Pacific area that we discussed in the call also. So I'm feeling really good about that. GSI this quarter had a book-to-bill of over one and Australia had a change of government and a bit of a reset. They've actually kind of realigned that platform very strongly and are doing well. And the U.K. business through Frazer-Nash continues to really perform strongly with good bookings also.

So bring us back to defense and Intel and really the advance modernization, the systems engineering business is it continues to do really well with the SMEC-type resilient type business model and the intelligence piece was probably the one that was lagging a little bit behind, but we've announced recent awards there that allow us to be very excited about what's going to happen to that next year. So I'm excited across all the segments, Steve, is the answer to the question. And I'm sorry if that sounds a little bit sort of, hey, everything is going well, but that's actually the truth. And really, obviously, they won't all grow at the same pace and they won't all win work in the same quarter. But overall, the trend and the momentum in each of those businesses is really positive.

[Operator]

We now have Jerry Revich of Goldman Sachs.

[Clay Haarmann, Goldman Sachs]

This is Clay on for Jerry. Can you give us an update on the timing of the Homesafe contract and the revenue burn that you expect in 2024?

[Stuart Bradie, President & Chief Executive Officer]

Okay. So as you know, we've got in 20 -- and this year, we've got nothing in for home safe no moves in the forecast and I think that's probably appropriate. We'll do some, of course, but it will be very, very modest. And so the ramp-up is progressive through the course of next year. I think we've been quite clear we're going to get to about $1 billion in revenue by the end of the year in cadence, and then that will continue into '25.

[Clay Haarmann, Goldman Sachs]

And as a quick follow-up separately. Can you update us on the pipeline of ammonia projects that you're tracking? And talk about the supply limitations that you have on your side regarding the number of projects you can be working on at a time.

[Stuart Bradie, President & Chief Executive Officer]

Yes. I think because it's a licensed business, we're not really bumping up against constraints on the numbers we can do. We can do at least several. We announced a number of projects, ammonia projects across the gray blue and green spectrum last quarter. The activity levels, again, across all three is still high, and we've got a lot in our pipeline. Obviously, the green solution we announced this quarter is very exciting, just given its scale. So we don't really disclose the level exactly what we have in pipeline in the various areas. But ammonia continues to be very strong, both in terms of gray ammonia just for normal, I guess, supply/demand on the ammonia side, but also in blue and green ammonia for different applications.

[Operator]

We now have Michael Dudas, Vertical Research.

[Michael Dudas, Vertical Research]

Following on your thoughts on the ammonia question. Share us is the first half of the year, as you look out over the next several quarters, the regional breakdown of where the opportunities have been coming on the STS front from the licensing in project area. What are the -- maybe other pneumonia, the other couple of areas that are seeing much more interest in our -- in the opportunities that you can engage with the clients. And how is it -- are other emerging technologies or other companies starting to see the success that you're driving here and you're getting more incoming activity that can expand the portfolio on that front?

[Stuart Bradie, President & Chief Executive Officer]

Yes. So I mean, I think we've talked about this before, Mike, it is a very global business. And each quarter, there seems to be activity levels in one region or another, and it's -- and so one quarter happens to be in the Middle East in the next quarter happens to be and we talked about Hindustan Petroleum in India, et cetera. So has been in Asia. Asia is obviously growing fast now economically. And so it's everywhere, and it's actually picked up in the U.S. as well, more so than historic. So a very difficult question to answer. I would just say that we've got wins happening all across the world. China has been probably slower than historically has, and that's starting to pick up a bit of pace again, so -- which is a good fact pattern. And in terms of emerging technologies and the success we're having, obviously, we're in discussions with -- I mean one of the great things about our technology group is they're really good about monetizing new technologies and into getting them to scale. And obviously, we've been working on the plastic recycling to do just that and will the first plants on track to produce later this year, which I think will really accelerate the plastic recycle piece -- and then secondly, things like the Swedish biofuels around sustainable aviation fuel technologies. Again, we just announced that last quarter. So working opportunities around that. But we're looking at those constantly and making sure that we can get them a good accretive value for KBR and our shareholders, but at the same time thinking through where they sit in the monetization cycle. So -- so lots of activity in and across technology and really across all the areas in the portfolio, and we tried to highlight that a little bit with the awards from the green refining area the green sort of ammonia or ammonia market and obviously looking across the spectrum and things like lithium and our capability in that arena. So it's a very broad offering, and I said this before, it's kind of a perfect storm, and we're kind of firing on all cylinders.

[Michael Dudas, Vertical Research]

Thank you.

[Operator]

We now have Mariana Perez Mora of Bank of America. Please go ahead when you are ready.

[Mariana Perez Mora, Bank of America]

Thank you very much. Good morning.

[Stuart Bradie, President & Chief Executive Officer]

Good morning.

[Mariana Perez Mora, Bank of America]

So, my question is about Government Solutions. If you have any important awards that we should look at that are coming in the next 12 months?

[Stuart Bradie, President & Chief Executive Officer]

Yes. We haven't really covered off on that and we don't actually try and call out specific awards. We've sort of talked about the size of our pipeline. We've got several awards greater than $1 billion that we're waiting for news on, and we've said these will come through quite lumpy. We continue to have numerous in the $100 million range, as we've talked about previously, and those come through a little bit quicker, particularly the contract vehicles we have. So, we're not really going to call out anything specific, but the pipeline is robust. The number of large projects within there is attractive. It's across all the segments, and so it's very balanced.

[Mariana Perez Mora, Bank of America]

Thank you, and then about people. You mentioned how hiring was strong in the quarter. What are the challenges and opportunities you see in the midterm?

[Stuart Bradie, President & Chief Executive Officer]

Yes. Certainly, we put a huge, huge of effort as a people company into our people, and we walk that talk every single day. And as I said before, people are absolutely terrific. The big focus has been very much on retention and making the employee experience as good as it can be at KBR, making KBR a terrific place to work. making it highly inclusive, making it extremely diverse. And the external awards we mentioned earlier, I guess, recognition, third-party recognition that we're making progress in those areas were not perfect, but we're certainly making progress. So, our attrition rate has actually improved as the year has progressed because of the focus we've had on not just benefits, which are easy wins, but actually a lot in the development and talent management area as well. And then second to that is the on talent actually got going at the end of last year and coming out of COVID things we really doubled down in our to acquisition area and our recruitment efforts of mature. So, I think we've done a lot in that area, and I think the challenge is to ensure that we don't get complacent, that we stay vigilant, and we see to stay absolutely 150% true to a word that we're a people company and make our people feel really, really valued for the amazing work that they do. And if we do that, then we'll continue to issue I'm sure build momentum. And that's exactly what we're going to do.

[Mariana Perez Mora, Bank of America]

Thank you so much.

[Operator]

Thank you. We will now take the next question from Spencer Breitzke of Cowen.

[Spencer Breitzke, Cowen]

This is Spencer Breitzke on for Gautam. Thanks for taking the question. I was wondering if you could touch on any recompetes over the next 18 months now that IMO is out of the way, and any trends or revenue color for Eurocom.? Thank you.

[Stuart Bradie, President & Chief Executive Officer]

Yes, second question. First, I was actually in and around EUCOM last week visiting some of the offices and the sites there. I think the view is it's very enduring. We're not seeing any levels of slowdown. In fact, we're getting in summertime, and we're seeing this also a little bit in the Middle East as well. The we're doing exercises and things like that. So, I think the cadence is strong. The durability, if that's even a word, you know what I mean is strong. So, I think all positive all positive there. In terms of recompetes, you're right, we've won our largest recompete of the year, very good to get that behind us, particularly in the fashion we did so. This is a very technical bid, and we're not expecting any protests or anything like that. So, I think all good with IMOC III as we head forward through this year. For the next six months, very little in terms of recompetes, and as we move into next year, at the end of the year, we've got a couple of the larger NASA bids that will come up for recompete, but they won't really be awarded until the year after.

[Mark Sopp]

The revenue in '25.

[Stuart Bradie, President & Chief Executive Officer]

Yes. So, I think it's a fairly low recompete year next year. Once again, there'll be nothing huge in terms of a run rate basis. So, I think what we're going after and the work that we're bidding now, even if it comes through in a lumpy basis, will all be additive to the story.

[Operator]

Thank you. Our next question comes from Andy Kaplowitzh of Citibank.

[Unidentified Speaker]

Hi, everyone. This is Sahil on for Andy Kaplowitz so we're seeing robust capex spend coming out of the Middle East. Can you just maybe touch on your pipeline of work and opportunities in the region?

[Stuart Bradie, President & Chief Executive Officer]

Well, it's enormous. I mean we've got a significant business today in Saudi Arabia. We've got we announced we won quite a significant contract in Q recently and that the buildup of people there is in the hundreds today we're up to 1,000 people in Abu Dhabi, mostly doing project management work across the capex portfolio for had not. And again, we recently announced ongoing work with BP and others in and around Southern Iraq, again, quite important for us. So, the capex spend is across the whole of the Middle East. The biggest spender of course, is Saudi. They've just announced that they're going to a program of seven crackers and they're flooring notes of interest out for that today. And obviously, we're very interested not just in the technology, but the project management and the support that surrounds that. So, I think we're very well positioned. Aramco are looking to obviously move quickly away from burning oil for electricity into gas, and we're already supporting on the gas developments and doing front sort of high-end front-end decarbonizing work there. But also, they're looking at hydrogen solutions and ammonia as part of their long-term strategy.

So, I think across the portfolio, we're very well positioned if we win our fair share, that's an enormous volume of work just in Saudi in itself. And that's just in the energy arena. We're also doing the project management work for a new city outside Rialco Doria gate. We are engaged in NEOM with a number of services across that portfolio. And so we continue to see quite a bit of activity, I would say, in the high-level programmatic type arena in and around the Middle East, in particular in Saudi itself. And in Abu Dhabi, I think we're managing several billion of capex in the project management capacity, and we're very much a trusted partner for to do that and as they continue to invest to maintain market share and diversify their energy solutions, and again, very well positioned. So, I think it's a good story, the Middle East for KBR. I think our reputation is really good there, and we work very hard at the relationships and delivering and making sure we're adding value to the customer set there and understanding what their desire and needs are as we move forward. So yes, it's a very exciting place to be, and I think it will continue to be so for a number of years, just given the capital commitments and the fact that they've actually got the cash to fulfill those capital commitments.

[Unidentified Speaker]

Great. And just one other on IRA. What if anything, have you seen so far? And is this more of a '24 tailwind for the business?

[Stuart Bradie, President & Chief Executive Officer]

Yes. I think it's more a '24 tailwind. I think the K green sort of when we had this quarter has been obviously facilitated somewhat by the rail. Obviously, with a number of concessions and tax rates and things that makes the internal rates of return far more attractive. But as we move into the latter part of this year, there's a lot sitting there. We've talked a little bit about Woodside's hydrogen project in Oklahoma, and that's getting to the point where they're getting close to making final investment decisions and I think you're going to see a lot more like that as well. Yes, I think it's a tailwind going into next year. I think we're only starting to see projects mature enough to be awarded back to companies like ourselves.

[Unidentified Speaker]

Update on the opportunities around the direct energy programs for the Government Solutions segment. It seems like an area of increased attention is KBR well positioned here? How big of an opportunity could this be? And are there any specific potential pursuits we could hear about in the near to medium term, particularly in the time of such tumultuousness internationally?

[Stuart Bradie, President & Chief Executive Officer]

Yes. It's been a while. So I talked about shared and the directed energy program, but it's progressed well. I think through the rapid prototypes office has matured significantly. We've now extended the scope into additional vehicles and that, but it’s certainly one to watch for the future for KBR. That’s for sure.

[Unidentified Speaker]

Excellent. Thanks so much. And just quickly, do you guys have an update on the status of the Australian government business. We understand there's been some repositioning and reprioritization. When could that begin to contribute more growth over all of the segment?

[Stuart Bradie, President & Chief Executive Officer]

Yes. So as I think we're all aware, we had a change of government in Australia and they did a strategic review, which came out in March, and we shifted priorities and I think for us, it resulted in quite a number of significant awards in the major services provider area that came through in the quarter, which is terrific, but also quite a focus on things like Ocas and really the sort of the linkages back to the U.K. and the U.S. in particular, to ensure that there was a level of readiness and opposite sort of peer threats in the region. So I think a lot of effort going on there, and we're very well positioned as that progresses. And we're already engaged, as you're well aware, in the Ocas program and already providing services across that portfolio. So we're feeling pretty good about the future of where that business sits today both in the infrastructure side and I guess in the more sort of defence engineering technical side.

[Unidentified Speaker]

Excellent. Thank you guys so much for taking my call.

[Stuart Bradie, President & Chief Executive Officer]

Got it. Thanks, Oliver.

[Operator]

Thank you. As we have to further questions, I'd like to hand it back to our CEO, Stuart Bradie for some final remarks.

[Stuart Bradie, President & Chief Executive Officer]

Thanks, Rica. So just to close, no one actually said this like it's good quarter, but it was an absolutely terrific quarter. We beat consensus. We grew EBITDA and the teams we delivered outstanding cash, the accounts were distorted a little bit. I'm sorry, Mark put you all to sleep, explaining all the accounting treatment there. But the bottom line in that is, as he said, it was typically odd accounting treatment and obviously, not part of our true operating performance. Our bookings were terrific. Our bookings going into Q3 are already terrific. So and I think really a company that's outperforming in the operating line offsetting things that are external, like interest and things like that, that are somewhat out with our control is a terrific outcome. We don't make excuses. I know some other companies give targets, excluding increase in interest in things that we don't, we just tell it how it is. So I think a really strong operational performance. I'm really happy with the position of the company. I'm really pleased with where we are on the people agenda and with the bookings, the outlook is very, very positive. And I would leave you with a statement that we're feeling really good about our 475 target. So thank you for listening today, and we look forward to talking to you in the near future. Thank you.

[Operator]

Thank you all for joining. I can confirm that does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your lines.