KBR, Inc. (NYSE:KBR) Q3 2022 Earnings Conference Call October 26, 2022 8:30 AM ET
Company Participants
Jamie Kubiak – VP, IR
Stuart J. B. Bradie – President & CEO
Mark Sopp – EVP & CFO
Conference Call Participants
Bert Subin – Stifel, Nicolaus & Company
Jamie Cook – Crédit Suisse
Tobey Sommer – Truist Securities
Steven Fisher – UBS
Andrew Kaplowitz – Citigroup
Michael Dudas – Vertical Research Partners
Sean Eastman – KeyBanc Capital Markets
Jerry Revich – Goldman Sachs
Zane Karimi – D.A. Davidson
Operator
Hello everyone welcome to KBR, Inc.’s Third Quarter 2022 Earnings Conference Call. My name is Charlie and I will be coordinating the call today. [Operator Instructions]
I will now hand over to your host Jamie Kubiak, Jamie please go ahead.
Jamie Kubiak
Good morning and welcome to KBR Third Quarter 2022 earnings call.
First, I’d like to introduce myself. I’m Jamie Kubiak, the new Vice President of Investor Relations for KBR taking over from Alison who’s moved into a leadership role in our sustainable technology business. I’m excited to be here and for the opportunity to serve you.
Joining me are Stuart Bradie, President and Chief Executive Officer as well as Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today’s earnings presentation is available on 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 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
Thank you, Jamie. And welcome to the KBR team. And thank you all for joining us this morning. And of course and you’re interested in KBR. I’d be remiss if I also didn’t take the opportunity to thank Alison, she’s done a terrific job for us over the last few years, as you will all have experienced and know. And she goes on to bigger and better things within KBR.
So now on to Slide 4. Now you’ve seen this slide for several years now. the slide depicts our zero harm program, which has 10 pillars across the ESG and sustainability spectrum. And these 10 pillars and the underlying behaviors that make up the program and make it very successful, are really, really important to our people, and are an integral part of our values and of course, our culture. We have incredible people that KBR and every year, the amazing what they do in this area is captured in our sustainability report. So which takes us nicely on to Slide 5. This year’s report has recently been published, and is available on our website. Some key highlights from this year’s report are shown on the slide. Obviously not the full report. But just some key highlights.
I wouldn’t read them all out as a pretty self explanatory. But the key takeaway is that our commitment to strong ESG performance is unwavering. And our focus on looking after our people, the environment, and communities where we live and work, inclusion and diversity and being a socially responsible company with strong governance is evident. We will do all this while delivering shareholder value through the work that we do which I think is a clear differentiator.
And that leads me nicely onto slide 6, and the quarter highlights. Today’s presentation I think will be relatively quick as Q3 was a clean quarter. Mark will give you details in a moment. But in short, our revenue growth ex-OEW was solid in double digits with aligned earnings growth. Execution was once again terrific, resulting in strong margin performance and our free cash conversion was well above one. So a really, really strong performance. Trailing 12 months book-to-bill was 1.3 for the whole group. But once again STS outpacing. We continued with our balanced capital deployment strategy over and above the quarterly dividend we closed on the VIMA acquisition, which is in the UK enhancing our capabilities in digital transformation. And we repurchased about $50 million of our shares in the quarter. That’s about 125 million year-to-date.
As you may recall, we over-performed in Q1 and raise guidance. We also exceeded in Q2 and again in Q3. Both in EPS and cash and thus we will be raising guidance again today in both more on that later.
Now on to Slide 7. The market and STS has several tailwinds important long term themes that continue to be at the forefront globally. The energy trilemma of energy security, decarbonisation and high energy prices and affordability is a reality. And the outlook is strong, especially with governments like the U.S. introducing legislation that incentivizes the development of more sustainable projects, and areas like hydrogen which I believe you’re already aware of with wholeheartedly involved with companies like Woodside here in the U.S. already.
The market conditions are reflected in the book-to-bill. And I’ll just recap book-to-bill in Q1 for STS was 1.3 in Q2 was 3.6 yes, 3.6. And in Q3 1.4, which gives just under 1.9 for the trailing 12 months, amazing performance there and I think it really demonstrates the strength of that market and our position within it. Energy security was very much the same in our Q2 earnings presentation, and the activity and pipeline in this area continues to be very robust. However, this quarter, we decided to highlight the decarbonisation themes, and how these are translating into growing demand and backlog for KBR. Blue ammonia in the U.S., plastics recycling in Korea, green ammonia with associated carbon neutrality in Norway and move into the technology realm and carbon capture. Our work under contract is solid for the year and our EBITDA and earnings momentum into ‘23 and beyond is very, very exciting.
Now on to slide 8. The [GSR] loop has not changed too much this last quarter. National security, defense modernization, cyber and space superiority prioritization all areas of focus for KBR. Emerging technologies and innovation are key in areas like cyber science, AI directed energy and again, KBR is very well-positioned as you’re well aware. Budget requests in the U.S. and increase commitments in the UK are both positive. And with the backdrop of the ongoing conflict in Ukraine, continuing and additional funding committed to support that mission; all very strong thematic.
Our pipeline remains very, very strong, albeit war timings are actually quite difficult to predict, particularly in the U.S. This is reflected in our overall book-to-bill which is 1.5 in Q2 and 0.8 in Q3. So you see quite lumpy in terms of timing of awards. I think the trailing 12 months is a much better guide, which stands one across all of GS. International business continues to perform really, really well. And bookings and Frazer-Nash continue to be strongly aligned with UK priorities and budget increases. The U.S. continuing resolution is not expected to have a material impact or performance given bedrock of business on differentiation with an international portfolio. Similar to STS, the focus is on execution and our positioning for ‘23 and beyond given the high level of work under contract for this year.
We have highlighted some key words from the quarter, which again reflect the market outlook comments, and demonstrates I believe the enhanced capabilities and the agility required to be successful today. A new sizeable win under [Indiscernible] to digitize and modernize analog systems, with a modular open system architecture solution for vertical lift aircraft. I’m particularly excited about this one as it was hotly competed under the [Indiscernible] structure, and caveat excelled on technical differentiation.
Additional highlights this quarter include a cyber digitalization, when in the UK as prime. The new space suit went to return to the moon with Axiom we are a key technology and capability team member and selection of — as one of five who now have a hunting license across R&D of hardware, systems and software to enable scientific and technical intelligence for the National Air and Space Intelligence Center.
Absolutely incredible programs all exciting and very much aligned with a somatic of we do things that matter. And this really, really resonates with our people at KBR.
I will now hand over to Mark who will take you through the numbers in more detail, and of course, the guidance. Mark?
Mark Sopp
Thanks also and welcome to Jamie. She off to a great start. And a special thanks to Alison as Stuart said for a job really well done. on. And I think you all know that. So really pleased with this transition. I’ll pick up on slide 10 for the Q3 financial performance. As Stuart said, this was a clean quarter, that performance tracking really well. Just stepping back I think it’s important to highlight that despite global instability, war in Europe, high inflation, foreign exchange, headwinds, and rising interest rates, KBR delivered outstanding results across all parts of the business. We have an incredibly resilient, long term portfolio enhanced by attractive contract vehicles, technologies and solutions that afford near, mid and long term growth opportunities underpinned by the important long term somatic somatic that Stuart mentioned just a moment ago. So under the numbers, revenues were up 11% over Q3 last year on an Ex-OEW basis, reflecting organic growth in both segments, and the new contribution from Frazer-Nash, and VIMA our recent acquisitions. Margins were really strong and excellent execution and favorable mix. I’ll cover more of that on the next slide.
In a non-operating items were well in check, which is notable given the market conditions in foreign exchange and interest rates. Specifically, we overcame about 6 million in P&L headwind in the government segment from the strengthening of the dollar against British Pounds and the Aussie dollar. It’s also important to note that while our STS business benefits from a diversified global footprint, it generates roughly 85% of its revenue in U.S. dollars, significantly reducing FX volatility in that segment.
As for interest, we did uptick expense this quarter by 3 million. But this was contained by low debt levels below leverage ratio of 2.0 and with roughly 70% of our debt at 70% of our debt, being at fixed rates. More on this in a moment as well. This all contributed to healthy adjusted EPS of $0.65 up 12% on ex-OEW basis. Operating cash flow for Q3 was terrific at about 120 million for the year-to-date totaling 336 million representing an off cash flow conversion of over 115%. Together with a favorable settlement and asset sale proceeds earlier this year year-to-date deployable free cash flow totals more than half a billion dollars, enabling M&A, debt reduction and increased buybacks. And finally, I’d like to re emphasize comments we made last quarter with significant new joint venture activity, revenues are becoming less indicative of the economic progression of KBR. From a business portfolio and financial perspective we are focused on profit growth, strong cash flow conversion, lowering our cost of capital and achieving strong predictability.
Onto segment details on slide 11. Starting with STS top line growth was an excellent 16% organic, but even better earnings growth of over 60%, 60 on heavy mix of licensed activity across the intellectual property portfolio and growing contributions from equity in earnings. EBITDA was 20% of revenues well ahead of our target in the mid teens. As the licensing mix can change quarter-to-quarter I would reiterate our STS margin target remains mid teens with expected annual improvement of one to two percentage points per year.
However, and as suggested in our last call, the market conditions are robust vis-à-vis our offerings and our IP and we are tracking ahead of our 300 million targeted EBITDA by 2025. This diversified low risk unique global business is proving out its growth plan, is showing resiliency and adaptability, excellent profitability and continues to consume no working capital. There are not many businesses out there that deliver these attributes.
Government continues to be steady. While appropriations for government spending are strong in all of our markets we are seeing some outlays drag particularly in the U.S. Certainly part of this is due to focus on supporting Ukraine, and we’re very proud of our own efforts to assist the U.S.- European command on this mission under LOGCAP V Margins were good at 10% for the government segment, reflecting up market offerings and ongoing strong program performance. Again, foreign exchange did impact reported revenue and profit levels here in this segment, but did not impact margins.
On the slide 12. As Stuart mentioned earlier, strong cash flow is driving capital deployment options, and we continue to believe a balanced approach and deployment is most prudent. We used over 70 million for the acquisition of VIMA, returned almost 70 million of cash to shareholders via buybacks and dividends and our leverage ratio did not change from last quarter. While not shown here, we bumped up our interest rate swaps to protect against rising rates. Our fixed to float ratio is now circa 70% fixed with much of that achieved through proactive and now quite valuable interest rate swap agreements. These agreements endure through 2027 and keep our fixed borrowings at a very attractive rate of under 3%. I think that deserves a real shout out to our treasury team once again. We increased stock repurchases to 50 million in Q3 and with that, our board approved an increase to our buyback authorization to 500 million representing 7% to 8% of our market cap.
Finally, onto guidance slide 13. We’re ahead of pace through Q3 with strong overall business visibility into Q4. We are narrowing our top line range for revenue to 6.5 billion to 6.7 billion for the year. We’re upping and narrowing our adjusted EPS guidance to $2.60 to $2.65 and reducing the expected tax rate range by 1% with R&D tax credits expected in the fourth quarter. The increase in our EPS guide is the result of strong year-to-date operational performance, plus the expected R&D credits, which together more than offset headwinds from FX and interest.
Lastly, we’re increasing and narrowing the adjusted operating cash flow guidance to 375 million to 400 million, with margins being unchanged. So thank you. I’ll turn it back to Stuart for closing remarks.
Stuart J. B. Bradie
Thank you, Mark. And onto our final slide of today’s slide 14. I think we can all see that KBR remains very well-positioned opposite or long term thematic that really favor our solutions and our technologies. Our STS business has exciting near, medium and long term market tailwinds. It has increasing backlog margin and EBITDA and its proportion of earnings just over a third this quarter and overall KBR continues to increase given performance and outpace growth. Our government business is very well positioned in attractive areas of increased focus and funding and a substantial long term and predictable backlog and clear differentiation with international portfolio. End market momentum and areas of global importance that’s doing things that matter is reflected in a strong pipeline.
We have and we will continue to demonstrate discipline and balance around capital deployment strategically enhancing our portfolio and also recognizing value in a current trading price. Our 2025 targets remain intact, regardless of world and market volatility, interest rate increases, and FX. And a strong balance sheet helps, as does the multiyear visibility of our backlog, a very clear differentiator for KBR. Our execution has been exemplary. And for this, I would like to thank our amazing people. And this combined with our market outlook has allowed us, once again, to increase our full year guidance.
Thank you, and I’ll now hand it back to the operator who will open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Bert Subin of Stiefel. Bert your line is now open. Please proceed.
Bert Subin
Congrats on the quarter. I guess for my first question. Your guidance implies earnings decline quarter-over-quarter despite Stuart but I would say through your prepared remarks sound like pretty solid tailwind at the year end. Can you guys just walk us through why that’s the expectation?
Stuart J. B. Bradie
I mean, it’s pretty standard. If you look back, and I guess our history, I mean, the Q4 _ is really seasonality, you’ve got Thanksgiving, you got Christmas, you’ve got all sorts of factors coming in. And that’s it. That’s the main driver there. There is nothing sinister. There is nothing bad about the business of it. But as you rightly point out, the tailwinds are strong, but it’s just seasonal.
you’re well aware of that. So that this, of course, is not here this year. That’s a major delta year-over-year and the raw numbers.
Bert Subin
Yes, Mark, I guess I was talking on the quarter of a quarter looking 3Q to 4Q I didn’t know if there was an FX headwind that’s assumed in there as some of your hedges roll off or if that’s just typical seasonality.
Mark Sopp
Just seasonality. And I think the business is outperformed considerably to head off, I guess, quite reasonably sized FX and an interest rate headwinds I think guide is probably 15 million to 20 million for the full year. So we’ve managed the business performance has managed to overcome all those headwinds and outperform. So it really has been an amazing performance.
Bert Subin
And just as my follow up, can you guys provide any update on HomeSafe? I know the expectation was for an October decision. Do you think that timeline is extending? Or should we hear something in the next few days? And then just in the meantime, have you started working toward the potential transition, despite the fact that there’s still uncertainty there?
Mark Sopp
Yes, so I mean, there is an expectation, as you know, the state runs out at the end of October. And the expectation is that we’ll hear something hopefully this week, but I can’t guarantee you the thought process and the timing of that, but that’s the expectation. And I think the customer feels the same. So we’ll hear something in the next few days. And when we do, you’ll obviously get to know that quite quickly. And in terms of getting ready, I think we’ve said before about the delay, and this in terms of going through this process period has really allowed us to do a lot of the backbone development work and set up the systems and get the resources in place to de-risk the transition, but there still is a nine month transition period, once the award. So, again it’s not going to be used in material, as we go into next year. There will be obviously some at the end of that nine month period in terms of the news, but the peak is in the summer. So there will be a few 100 million, I guess, I don’t know, we’ll have to clarify that just on timing. But I mean, obviously, the ramp up comes as we go into ‘24. So very much supports our long term growth aspirations and terrific when assuming that will come through positively the next few days.
Bert Subin
Stuart, just a clarification question on that. If we were to find out this week that a favorable decision came in, then you think it would be sort of the nine month clock starts at that date.
Stuart J. B. Bradie
I think that’s right. I think they’ll be keen just to sit down and kick off a week after a few days after whatever and start to plan that through. And I made aware obviously that we’ve been, I guess working towards that. And we’ve made advances in some of the key risk areas. So I think very keen to understand that. So I think absolutely, it should be. That should be the right time.
Operator
Perfect. Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie, your line is open. Please proceed.
Jamie Cook
Hi, good morning. Nice quarter and two questions. One, just following up on the HomeSafe award. And I guess it’s unfair question Stuart but more about 2023. looks like if we just run right, your second half earnings in 2022 your base of earnings for 2023 is 260. HomeSafe doesn’t kick in until later in the year. I guess we have a positive from Plaquemines kicking in more, but I’m just trying to calibrate that with where the street is it I think three or four, three or five for next year, if we’re missing something there because that seems like a pretty significant ramp. And then I guess my second question is on the M&A front. I know, last quarter, you guys made a comment about being opportunistic with potentially larger deal keeping dry powder but just trying to understand if there’s any news on that front, sort of how the acquisition pipeline is looking. Thank you.
Stuart J. B. Bradie
I’ll do the second one and Mark, and maybe do the first one. I think not much changed from last quarter, Jamie, on the M&A front of the activity. I mean, there’s still quite a bit coming into view if you like. But I don’t think the multiples have come down really any quite quickly, as you’d have expected, it does take a bit of time, and the capital markets are still not terrific. And so I think, for us we’ll run into probably the end of the year with exactly the same philosophy as described last quarter. And I don’t, I mean, you never know, but I don’t think that will change over the next few months. And but that as we come into the year, I think the opportunities will, we’ll certainly be looking very carefully at them. So really no change there.
Mark Sopp
Jamie Mark here. While everything I’m about to say is subject to what the court says, hopefully this week, the client has been very clear that should we prevail and move forward that we will not participate in the busy season of the moves in ‘23 and we will really start moves toward the end of the year. And so with that, were that would not be much activity in ‘23. So it could be that the street numbers that you’ve referenced, are assuming more and so we think we should be cautious there because of what the client has said and the ramp up involved there. But we’ll know more once we get to court decision and what the client then says after that was changed. But that’s I think all of that warrants that should we prevail we’ll start to see some activity in Q4 next year, but not sooner.
Jamie Cook
And it just the follow up you didn’t answer on Plaquemines. I know like the margins in STS is starting to improve. I don’t know how to think about the run rate or how much that helps 2023 or any commentary on just Plaquemines contribution.
Mark Sopp
I mean, I don’t think we’re going to talk specifically about one project and its contribution Jamie. I think that the STS performance is outpacing that we’ve seen that I think they’re obviously it’s growing sequential require uncoil and book-to-bill support that continued growth. We’ve said publicly that we expected to double EBITDA to about 300 by 2025, we’re way ahead of pace to do that. And I will say a little more on that in terms of gains, and when we come out next year and Q4.
So I mean, the point we’re very, very upbeat about the positive momentum in that business and the performance that we’re seeing and our ability to actually attract great talent into the business with the work that we’re doing. And this whole sort of we spend quite a bit of time to explain the market or the decarbonisation and the focus on hydrogen and the future and things like that, that what we’re winning, and that’s a real talent magnet as well. So, I think that all bears while going into ‘23 and other than the, perhaps people override some of the HomeSafe assumptions, I think maybe the underwriting the STS assumptions, I don’t know, but certainly I think we’re feeling pretty strong about the business performance in that area.
Operator
Thank you. Our next question comes from Tobey Sommer of Truist Securities. Tobey, your line is open, please proceed.
Tobey Sommer
Thank you, I was hoping you could speak to the growth outlook for your space portfolio across civil, defense and intelligence. And maybe juxtapose that with the growth outlook for the Federal unit as a whole.
Stuart J. B. Bradie
So I think the growth outlook in I guess commercial space, Tobey is for us, that’s still quite a modest part of our business is not really material it is growing. But it’s probably not going to move the needle as we move into next year. I think in terms of military space, which is really up going into next year I think there’s a lot of excitement about our positioning there and the funding that’s flowing into that arena. And certainly our NTG businesses is very well positioned to take advantage of that. And certainly we’re expecting pretty strong growth in that arena, double digit into next year. In terms of the what’s happening in the civil side, the NASA side, obviously, the budgets are up. The timing of award has been slow, as you’re well aware.
And so I think as we look into next year, we’ll get we’ll have some modest growth, they’re probably in the single digits, that’s really our expectation. And, but of course, that can change on a dime, if some of these awards come through and on a timely basis. So I think, again, that’s a, it’s an early indication, but that we’ll be able to give you more color, I suspect when we talk about full year ‘23 when we meet with end the earnings and in the end of Q1 really, February, or next year. So that’s kind of where we sit, if that makes sense.
Tobey Sommer
It does. From our overall tax perspective, or how big is it with percent of either federal or the total company?
Stuart J. B. Bradie
I mean, it’s about a billion as a science and space business unit, we of course, do quite a bit of middle space in defense and intelligence. So together, it’s a pretty big chunk of the Fed business, or GS overall. And as I said the growth prospects there no space, in particular, and [Indiscernible] contribution, there’s only increasing really exciting and kind of NASA space of courses that will club copier with the how the procurements come out. But we were done well with the team, we compete to have a competent, cutting edge.
Mark Sopp
If you combine all three areas, plus a little bit, maybe we do outside the U.S. is probably 1.3 billion to 1.5 billion in that as a good total.
Tobey Sommer
You’ve talked about how revenue growth because of the emergence and importance of joint ventures isn’t quite as an important metric going forward to measure your success. I was wondering if you could share with us any changes in incentive compensation, either that have been made or that you contemplate in order to drive the behaviors of this new kind of business mix?
Stuart J. B. Bradie
Yes, so I mean, in terms of our short term incentives, they’re all driven by profitability and cash and sustainability. So they’re completely aligned to driving our needs and driving associated cash flow.
Mark Sopp
That’s been the case for some time.
Stuart J. B. Bradie
Yes. I mean, we said when we redefined KBR that, that what the focus would be on quality of earnings and delivering cash as a consequence, which is a true measure, I think of profitability, and we’ve been very focused on that, really is just that as Mark and that hasn’t changed for several years. I think, really, the comment on performance coming through the EBITDA line just because of the way you account for joint ventures it doesn’t really change the way that we look at winning work or compensating people we’ve always been driving with bottom line growth.
Operator
Our next question comes from Steven Fisher of UBS. Steven, your line is open. Please go ahead.
Steven Fisher
Great, thanks. Good morning. So the 8% organic growth, I’m trying to contextualize that. So how does that compare to your expectations going into the quarter? And what organic growth assumption do you have embedded in your Q4 guidance and I guess the bigger picture here is how relevant is that organic growth concept going to be for 2023 given what you’ve just been talking about in terms of the change in equity income and focused on EBITDA? Is there going to be an organic EBITDA growth metric, we should be thinking about for next year?
Stuart J. B. Bradie
I think we have given as part of our long range guide, Steve, the growth in that area of overall I think of 6% to 9%, of your company level. Then asked for that HomeSafe, obviously. So we’ve already given that guide. We’ll have to look at that, obviously, in the context of the acceleration, a bit of STS and we’re doing an investor day, obviously, at the end of Q1 and we’ll be dusting some of these things off to reflect current market conditions and the current performance frankly. But ultimately, right now, the number is 6% to 9% CAGR goes at that at across that EBITDA line. And so, again, I think, over 2025, very tidy. And so I think everything’s in line.
Steven Fisher
And that’s what have you embedded in Q4 something similar?
Stuart J. B. Bradie
Yes, I mean, I think we’ve said that seasonality Q4 is comes off a little bit because of what we discussed earlier in the call.
Steven Fisher
And then just more focusing on the government segments. You talked about some of the outlays dragging in the U.S. and my understanding is that they’ve maybe overall picked up a little bit. So I’m curious if that’s going to start flowing into the government segment at some point. And do you think about 2023 how good a sense do you have on whether all four of your segments within government should be growing organically next year? And what are some of the kind of determining factors there?
Stuart J. B. Bradie
Yes. I mean I think what we tried to demonstrate this quarter, and looking back on book-to-bill in the previous quarter, Steve was exactly that there’s a bit of lumpiness and things like that that’s come through. I think, overall, we’re very pleased with the quality of the pipeline. And the expectation is that would start to sort through over the course of the next couple of quarters. In terms of the outlook across the various segments, I think we’ve been very clear that GSI continues to perform really well, has strong backlog, terrific margins, and it’s going great guns. So no real issues there at all.
And hopefully, people recognize that there’s a clear sort of difference with KBR. In terms of the others, I think I’ve already touched on space. And I think and I’ve also touched on the, I guess the intelligent cyberspace, through military space, as well. And I go through there. I think we’re seeing in our systems engineering business, which does things like — and these recurring quick to procure type contract vehicles, it’s good, that’s going really, really strong and has and we’ve actually reported that quarter-on-quarter for many quarters. And I think that momentum continues in those arenas.
And the themes around defense modernization and some of the digital solutions, they’re looking at absolutely clear. And we highlighted that, again, in some of the awards we picked to showcase this quarter. So really brings us to really the readiness and sustainment business. And of course our expectation is that the mission in particular EUCOM will be more enduring, certainly into next year. That’s the visibility we have today. And obviously, with the addition of HomeSafe I think that segment more changes quite considerably. So we’re feeling pretty good about each of those segments and the pace of growth and on readiness and sustainment will really be driven I think by HomeSafe. We will obviously hopefully no more of that later this week, and we’ll be able to come to market quite similar and explain that a bit more fulsomely.
Operator
Thank you. [Operator Instructions] Our next question comes from Andrew Kaplowitz of Citigroup. Andy your line is open, please go ahead.
Andrew Kaplowitz
Stuart maybe you can give us a little more color into what you’re seeing in the UK, obviously, you recently increased your exposure there. Last year, Frazer-Nash, this year VIMA. How are those acquisitions doing and do you expect to see any impact from slowing UK on your businesses?
Stuart J. B. Bradie
So as we announced last quarter and good questions. And that really, we had added some executive weight to our team by bringing Paul Kahn, the seasoned executive in that arena and we’re driving integration of particularly VIMA and harmonic into Frazer-Nash and that will be a very strong brand for us in the UK, it’s very well recognized. And I think the level of funding that the UK Government is committing, either the Australian government interest into defense is increasing. And, of course, we’ve got the complexity in the UK of Brexit, as well. And obviously, we’ve got war on our doorstep in Ukraine. So it’s a very interesting time in the UK.
And we’ve got a bit of a revolving door at number 10 Downing Street, as well as and hopefully that’s resolved, at least for the next little while. So I think a little bit stability with the political scene, I think the commitment around defense is clear from the conservative government, and as a consequence of those businesses are going really well. I work in defense, digital is going exceedingly well. We’re doing well digitalizing the Navy at the moment. And we expect that to move into other arms of the military because we’re at the forefront of the digital transformation from programmatic skill set.
And then secondly, I think just the work in government in general is flowing into Frazer-Nash at quite a clip, and I’m very pleased to announce that they’re actually growing I mean, in that type of business. I mean, one of the asset test which is people growth and the people growth numbers are up significantly so well in double digit.
So I think that those businesses are going perfectly well and that I think we lived very much aligned with that values so those, the culture alignment is very strong. They really feel that they do think that they’re model also.
And I think absolutely can be more pleased on this , great, great people.
Andrew Kaplowitz
Thanks for that, Stuart. And then maybe kind of a similar question around STS in the sense that obviously, slowing global economy, you’ve had very strong book-to-bill there. And you said, 1.9, this year you do have still some energy exposure? I don’t know if I call it legacy anymore. But so it’s a much different business than it used to be could you still see? Or is your expectations still this this very positive book-to-bill in STS, as you go into ‘23, even if the global economy continues to slow?
Stuart J. B. Bradie
Yes, I think so. I think as I said, we’ve got this identity trilemma. And I can’t see that changing in terms of the drivers in those markets. I mean, energy security is right at the top of the list for obvious reasons. And some people have been talking about blackouts in certain parts of Europe and things like that. It’s pretty scary stuff. And so the diversification of supply is right at the top of the agenda. And then you’ve got the whole climate change agenda. And you’ve got the fact that the say the segment has been under invested in for a couple of years. So the supply demand piece and obviously, with the reductions coming out of Russia, etc. are obvious.
And so I think you’ve got and then if you think about the next piece of that is that you’ve got, I guess, oil companies and national oil companies and chemical companies that have got quite a lot of resource and financial capacity given recent pricing. And they’ve got commitments around a hydrogen economy into the future and decarbonizing their, the way that they produce energy. And so you’ve got all these factors at play that are hugely aligned with our technology and high end solutions and our technical capability and so I really think it’s, I cannot see that slowing down and I think we’re very well-positioned and certainly our book-to-bill would reflect that actually, this will say the proof of the pudding is in the — but how many because you have to regardless, I heard people talking about the output. And I think that is reflected in our performance. I think it’s reflected in our briefings.
Operator
Thank you, Andy. Our next question comes from Michael Dudas of Vertical Research Partners. Michael, your line is open. Please go ahead.
Michael Dudas
First, Mark, Stuart can you remind us of any read competes that are left for this fiscal year and as you’re looking at the 2023?
Stuart J. B. Bradie
None for this year. I think we’re all behind us. And into next year, I think they’re, I think we’ve got one of our big NASA ones _ but that will actually be the time that procurement processes on it will be in ‘24. I think it’ll be compete next year.
Mark Sopp
Yes we have some activity to get out the door in terms of proposals and all of that, but the actual risk really falls into the following years. So there’s really quite a bit of book-to-bill cover for ‘23 already, and then we’ll continue to grow until we start the year. So we’ll have the guidance ‘23 early as well backstopped by, work under contract.
Michael Dudas
Thank you. And following up, Mark you’ve talked through the call, you guys have talked about M&A pipeline a bit happening near term. And we’ve done a great job on hedging some of the debt with some pretty attractive rates during the current environment. So as we look towards free cash allocation next few quarters is I know there’s it’s balanced, but is you anticipate continuing to allocate capital to share repurchases.
Mark Sopp
Yes, as Stuart mentioned earlier that we think the price represents a very good value on the buy side right now. And we demonstrated that with 50 million of buybacks in the quarter. So that’s an uptick from historical levels, and you saw the increase in the authorization as well. So our board is very supportive of this as well. We’ll look at our dividend we always do at the beginning of the year. And we’ll talk about that in February. But we of course, have a strategy to pay an attractive dividend. So we’ll pay good attention to that. And then I’m just going back to the last caller say that in light of the interest rate environment, and there’s more cards to be dealt with there. Despite the success we’ve had in hedging our exposure there, we still all things being equal, prefer to be cautious with capital at this time and see that shakeout and that would really portend to the M&A area. So we’ve always been very selective, we’ll be very, very selective in this market, given the valuation comments Stuart made earlier, as well as the unknown interest rate direction.
Operator
Our next question comes from Sean Eastman of KeyBanc Capital Markets. Sean, your line is open. Please proceed.
Sean Eastman
Hi, team. Thanks for taking my questions. And Alison definitely deserves a shout out here. Thanks so much for all the help and time, over the past number of years. I wanted to come back to the GS revenue discussion. I just want to try to flash out what the big swing factors are around where the revenue run-rate goes from here over the next say, 12 to 18 months. It seems to me like perhaps the NASA piece of the business is one of the bigger swings. Correct me if I’m wrong there. But maybe you just update us on what’s in the near term pipeline there? What we should be tracking? And just yes, how to think about the swings around the revenue run rate and the bookings momentum NGS over the next couple of quarters?
Stuart J. B. Bradie
First, I’d say NASA/ship space is while the procurements are pretty chunky, that’s a pretty steady state business. I expect to see modest growth there. Not a lot of volatility in what we see there, and that’s if you look at the past that’s been pretty consistent with our trending. D&I which has more IDIQ vehicles is the beneficiary when there’s a lag in outlays and they got money appropriated. They need to spend and we’re starting to see more growing suites there, September and October so, it’s going to be pretty good about pace of spend in that area particularly those of the things happening in the world – and then maybe for you know capability and so that seems deliver there in those space and in the consumer integration and so forth.
And so I think that one has opportunity in that light. Regarding the – and subject to royal condition but as said earlier we are in pretty stable situation and in NEWCOM as a result of what’s happening there.
Take a great story of GSI because [Audio Gap].
Operator
Thank you, Sean. Our next question comes from Jerry Revich of Goldman Sachs. Jerry, your line is open, please go ahead.
Jerry Revich
Expand the discussion on heritage tech. And as I look at slide 7, you folks have had really a number of orders green ammonia, carbon capture technology. As we look at for the legacy heritage tech business today can you talk about what proportion of the bookings coming in are for green technology like plastic recycling and these other areas? Because it feels like they’re a disproportionate portion of the bookings that we’ve seen over the past year.
Stuart J. B. Bradie
That’s certainly more emphasis on the green technology portfolio. That’s for sure. And I think over time is that we talked about a morning about, it’s really around hydrogen. And I think everyone understands that. And we’re also we’ve not really talked too much about this, but we’re actually doing standalone hydrogen developments in the U.S., for example [Indiscernible] And certainly the new bill makes yours developments far more profitable in terms of rates of return so I suspect more of them to come. So I think you’re going to see an increasing amount of sales that are green from that portfolio as we move forward, Jerry but ultimately, there’s still an energy security challenge. And so there’s still investments and what I call more traditional solutions and all things business is doing very well and petrochemical licensing is also doing well. So they all come with the green aspects in terms of decarbonisation and efficiency and more energy use, etc. So if the market holds, but ultimately, we’re seeing a portfolio selling very, very well, rather than just one or two technologies, it’s across a range, which I think actually is terrific, because you can never predict timing of these awards. And so the more _ you have in the fire _ the more predictable and the growth is, and that’s what we’re seeing. So but I do agree with you, I do think that as we progress over time, certainly the hydrogen aligned technologies are going to be in circular economy aligned technologies are going to be very much at the top of the pack.
Jerry Revich
And when you look at the bookings that you’ve had, just for heritage tech within the past year, just qualitatively, it feels like you’ve been running north of a 1.5 book-to-bill in that sub segment. Can you talk about whether we see a big ramp up in project execution and revenue burn over the course of ‘23? Or what’s the duration on these awards?
Stuart J. B. Bradie
I mean I think as you know that the awards in that arena are actually quite fast paced. And typically, everything goes to a, there is a lot of rides on Q4 obviously, as people tried to realign budgets and spend money and think Q4 is usually quite an active period for that part of the business. But we look at STS as an overall business rather than just, heritage tech or energy security or whatever it’s like, it’s an overall offering that delivers, I think huge value to customers across that value chain. And so that’s the way we look at it. That’s the way we talked to the market about it. We talked about the overall growth and margins and the book-to-bill across that business. So we are seeing more activity in the green arena, no doubt about it. And we’re very well-positioned. And we actually realigned the whole of our historical business opposite that market a couple of years ago, and I think that’s paying dividends today.
Jerry Revich
Super and lastly Stuart on that note in terms of long term targets. I think you’re at 90% margins for sustainable tech segment. You’re at 20% this quarter. How sustainable is that 20% near term, you called out a number of items? I want to review just expand on what’s the run rate as we stand today any lumpy items?
Stuart J. B. Bradie
Yes I think. Yes, so the run rate is a bit above pace. So I think last year, I think when you took out some I think when you took out some of the one offs and things we were running at lower teams, so 40% last year, and we said, we grow the margin, 1% to 2% per annum. And I think we’re at the upper teams in terms of when we look at it blended over the year. So I think that as Mark said, the 20% that we delivered this quarter is due to healthy licensing mix. But when you actually put that across the whole year, we’re ahead of pace, but we won’t be at 20% and that’s for sure. I think we’ll be in the highest that the upper teens that level, but again, that’s a hugely positive statement. I mean we’ve got to put it in context. And I said, terrific performance.
Mark Sopp
We talked about hitting that in the next three or four years, when we initially initiated the targets. And we’re there now. So we are seeing an acceleration from great next great markets. Other projects kicking in as well. So we’re ahead of the game, as we said all along, and that’s why we made the comments on the 300 million EBITDA being achievable on a faster pace as well.
Operator
Thank you, Jerry. Our next question comes from Gautam Khanna of Cowen. Gautam, your line is open, please go ahead.
Unidentified Analyst
This is [Indiscernible] on for Gautam. Thanks for taking the question. Could you provide any sort of commentary or qualification around European Command sales in 2022 and maybe 2023? Thank you.
Stuart J. B. Bradie
Yes, I mean, I think we’re probably around about 65 to 75 a quarter. I mean, it ebbs and flows a little bit, but it’s pretty constant around that. And we expect that to continue into next year.
Operator
Thank you. Our next question comes from Zane Karimi of D.A. Davidson. Zane, your line is open. Please go ahead.
Zane Karimi
Hi, this is Zane Karimi for Brent Thielman, D.A. Davidson. Good morning. I want to start if you give some color and whether we should anticipate continue to ramp up and activity related to LOGCAP in Europe in the second half, or is that plateauing?
Mark Sopp
I think, I mean I guess we just covered that. I think it’s stable at the moment between 65 and 75. And I think that that’s probably the visibility we can give you at this juncture, as we move into next year. And some quarters that does uptick depending on I guess mission demands, etc. But, but that’s probably a good way to think about it and model at the moment. And hopefully, as we get into the end of the year and we understand what’s happening in terms of commitments and things into next year we’ll be able to update that number in February earning.
Zane Karimi
Thank you, and could you provide more color on government solutions? Are you able to comment on work under contract for 2023?
Mark Sopp
Not yet. I mean, I think we’re in a unique position, Zane and that we do have a substantial amount of work under contract, and not just for ‘23 but through ‘25 and beyond. And we’ve been very, very clear about that. Assuming we keep whenever we compete such a not high numbers, I mean, and nominal rate, and then we’ve probably got about 70% of our work under contract today to achieve our overall 25 targets. And so obviously that goes up because we get to ‘25 as we when you work. So we’ve not set the guidance for ‘23 yet, so it’s difficult to tell you what kinds of contract levels but we’ll be going in with obviously a quite a substantial amount of work under contract given what I’ve just said in terms of the long term, bedrock of business, but also the book-to-bill and STS as well. So I think we’ll be going in and giving guidance in February with a strong underlying work under contract. But I don’t know what the number is yet.
Operator
At this time, we have no further questions. So I’ll hand back over to Stuart Bradie for any closing remarks.
Stuart J. B. Bradie
Thank you very much, Charlie. Again, thank you very much for taking the time and your interest in KBR and for all your questions. I would like to just reiterate, I saw some of the early reports coming out that are increasing guidance for the typical only to tax and that can be further from the truth. We tried to lay out in this call that we’ve had 15 million to 20 million of headwinds with FX and interest and we’ve outpaced from an operational performance perspective to offset that and more. So in these volatile times I think the resiliency of our businesses that can’t be showing through and reflection of the numbers, it’s not just a finger in the air, we’re actually delivering it. And I think the markets we are in a robust I think the performance of our people was exemplary and I couldn’t be prouder of them. That was just absolutely terrific. So thank you again for your time and we look forward to follow up calls and talking to you all soon. Thank you.
Operator
Ladies and gentlemen this concludes today’s call. Thank you for joining. Now you can disconnect your lines.
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