Kbr, Inc. Q1 FY2024 Earnings Call

Good morning, everyone, and welcome to the KBR Inc. First Quarter 2024 Earnings Conference Call. My name is Drew, and I'll be the operator on today's call. At this time, I would like to turn the conference over to Jamie DuBray, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to KBR's First Quarter Fiscal 2024 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.

Thank you, Jamie. I will start on Slide 5 on developing our people. Today, I wanted to take just a few moments to talk about our people because our people, as you all know, are key to our success. They are the ones who deliver value to our customers, they solve the complex challenges, and they drive innovation at KBR. And they are the ones who make KBR an absolutely great place to work. That's why we are dedicated to creating a culture of learning and growth for all our employees. We want to empower them to reach their full potential and, of course, have fulfilling careers. In recent years, our Chief People Officer, Jenny Miles, has greatly expanded our talent development programs, spanning all parts of the globe. From new hires to senior leadership, there are development opportunities for every level. I'm pleased to say that this has actually been recognized recently by MSCI, where we've received a 4-star rating, the top rating in human capital development this year, an exceptional milestone and recognition. Now I won't spend too much time on the slide, but as you can see, we've highlighted a few examples of these global programs from mentoring to internal career mobility and importantly, communities of interest and development around skills for the future. This, in particular, is an area that we have recognized as really important, and we're positioning to get in front of. Nurturing key talent for the future is a challenge that almost all businesses across the world are facing today. And we've often talked about our people focus at KBR to help mitigate this risk, but it will be an ongoing part of our future, no doubt. So to conclude, as you heard me say before, KBR is a values-driven organization with our people at the heart of all that we do. Our unwavering commitment to hiring the best and the brightest, rewarding and recognizing our people at all levels, and developing talent and skills for the future are all key enablers and frankly, the true driver of shareholder value, short, medium, and long-term. So now on to Slide 6, and I'll cover our consolidated performance. Today, our presentation will actually be quite short. It's been a great start to the year with a very clean first quarter. From a safety perspective, we started the year well, which is always pleasing as reinvigorating the organization post the holidays is a task we take very seriously. Looking at financial performance, we started the year well and ahead of pace, especially in STS and GS International. All businesses delivered at or above expectations, which was absolutely great, and the expected slowness in EUCOM in our readiness and sustainment business continued, reflecting funding delays in Congress. Consolidated revenues were $1.8 billion, up 7% year-on-year and was actually an all-time high since our transformation in 2020 when you exclude the peaks of OAW in 2021. Adjusted EBITDA outpaced expectations with a 14% year-on-year increase with margins bumping up 70 basis points, which is very pleasing. Cash was also a bit above expectations at $91 million. Given Q1 is typically the slowest quarter, we're very pleased with this result. The strong performance across all key metrics certainly derisks the following quarters and positions us very well to deliver our '24 guidance. As of Q1, we have approximately 84% work under contract to deliver that guidance. Now on to Slide 7 and some key awards. For STS, activity levels remain high, opposite the energy trilemma as we covered in the STS Primer webinar recently. We've highlighted a couple of key wins and milestones that happened in Q1. These have been announced during the quarter, so I won't read them all again. Collectively, you can see that ammonia, decarbonization, energy security, and energy transition remain the key drivers. As everyone is aware, the one key change from last quarter on the government side was the government defense budget was approved, which should increase the award activity in the U.S. going forward. We also expanded our human health and performance franchise to include U.S. Air Force Combat Command, in addition to our ongoing work with NASA and special forces. Another notable achievement in the quarter was effectively a 4-year IDIQ award to provide cybersecurity services and risk management to the Defense Health Agency. GSI had an excellent quarter, growing year-on-year in the mid-teens and securing the post-PFI award for the heavy equipment transport contract being the standout. This is a multiyear contract with margins aligned with expectations for GSI, so a great outcome. I'm also very pleased to announce that we have successfully completed our first moves under the HomeSafe Alliance. This is a significant milestone. As planned, these were all in-state moves and the volume will slowly ramp up in the coming months. Bookings in both segments were actually very, very similar at 1.2 times on a trailing 12-month basis. When you exclude the large burn on the LNG project in STS. As you'll see on the slide, STS trailing 12-month book-to-bill was 0.9 times due to that large burn, but the rest of STS's performance continues to be strong, delivering a 1.1 book-to-bill in the quarter. Historically, Q1 is a slow bookings quarter, and we are pleased with the results, especially with the strength of the pipeline. So in short, a great start to the year with positive momentum. Outside of the normal course of business this quarter was very quiet, which is very pleasing. And now I'll hand on to Mark, who will take you through the numbers in a bit more detail. Mark?

Fantastic. Thank you, Stuart. Hello, everyone. I'll pick up on Slide 9. Reiterating Stuart's remarks a little bit, the team is off to a great start for the year with ongoing growth this quarter, up 7% in revenue and particularly strong adjusted EBITDA growth at 14% on substantially improved margins. Core profitability has been consistent from quarter-to-quarter. We're really pleased to see that; that's a key element of our strategy, of course. We also had some profit pull forward in STS from things planned later in the year, bumping up the consolidated adjusted EBITDA margin to about 0.5%. I'll hit that in the segment's chart here in a moment. Adjusted EPS was $0.77, up 15%, consistent with the EBITDA growth. Below the line expenses were up quite a bit, primarily from a $5 million nonrecurring charge for the cost to complete our refinancing transactions in January. That headwind was offset by the lower share count, enabled by the buybacks we've been making over the past year. Vitally important, cash flow was terrific, registering at $91 million, which demonstrates good quality of earnings. Our low capital intensity model is also central to our strategy. I'll move on to Slide 10 for the segment results. On the left, STS is continuing to drive great momentum with 15% top line and adjusted EBITDA growth. Customer attraction and retention continues to build with STS' targeted strategy to tap global demand driven by the energy trilemma. We'll talk quite a bit about that in the IR Day. We believe the trust being registered with blue-chip customers around the world will offer enduring benefits to this business area and to KBR for years to come. The adjusted EBITDA margin of 22% was a little higher than expected. Here is where we had a favorable closeout in Q1, which benefited the segment margins by about 2 percentage points. We had planned that to spread over the full year, so that benefit shifted left. Over to Government Solutions on the right side of the chart, top line was up about 4.5% with adjusted EBITDA up 6% on modestly higher margins. This can be attributed to mix as the stronger growth drivers in the quarter with higher-margin international and D&I business units, Defense and Intelligence. Defense & Intel and International had double-digit growth. S&S science and space grew at 7%. R&S contracted about 12%. This is tied to activities in the European Command theater which have been soft given the lack of funding progress to support Ukraine. I'll move over to Slide 11 on capital matters; the refinancing we did at the beginning of this year sets us up well for capital matters in 2024 and beyond. We have a terrific balance sheet with plenty of capital deployment options. For starters, the team generated terrific cash flow, as I said earlier, of $91 million in Q1 despite that being a seasonally low quarter for cash. You'll recall we upped the dividend about 10% this quarter and also completed $50 million in buybacks. With that, we exited Q1 with a leverage ratio of 2.0, quite important as the high-interest rate environment seems stickier than the market had expected. You might recall us saying that we expect that the interest rate environment stays higher for longer, and so far it's true. Deployment priorities remain the same. We can leverage moderately for accretive M&A should opportunities present themselves. Absent that, we expect buybacks and debt management. I'll finish up on Slide 12. We're off to a really good start in Q1 with excellent work under contract coverage for the remaining quarters. As such, we're reaffirming our guidance for the year on all measures. Finally, like the rest of the folks around the table here, we're looking forward to seeing you at our IR Day on May 8, so I can't wait for that to happen.

Thanks, Mark, and very concise. I'll finish up on Slide 13 with some key takeaways. Firstly, a strong start to the year across all our key metrics, so really pleasing. Continued momentum in our key markets with the exception of R&S due to Ukraine funding delays as we've covered a few times in this presentation. Solid bookings and backlog in what is typically a slow quarter, so a good start again in that area. Approximately 84% of our work is under contract, and a strong Q1 really derisks future quarters, positioning us well to deliver the full year '24 guidance. First, HomeSafe moves were successfully completed, marking another great milestone in the quarter. Like Mark, I look forward to seeing you all on May 8 in New York for our Investor Day. Thank you for listening, and I'll now hand back to the operator who will open the call up for questions. Thanks.

Our first question today comes from Andy Kaplowitz from Citigroup.

Stuart and Mark, you mentioned Q1 tends to be a little lighter seasonally in terms of STS bookings, and I think you said 1.1 times the LNG burn. But could you elaborate on the pipeline of opportunities you're seeing, any delays across any of the end markets in that business? And what's your confidence level at this point regarding continued double-digit EBITDA growth in STS?

Yes. I mean I think we're quite clear, Andy, in the call that ex-VG, the book-to-bill for STS in 12 months is 1.2, which really underpins, I guess, 20% growth. The quarter stand-alone was 1.1. Therefore, our pipeline of opportunities, the activity levels in the ammonia market, the olefins markets, and really this energy trilemma that we've discussed in the Primer are continuing unabated, and we're seeing high levels of bid activity. We're seeing good momentum in the market. So we're very confident about the continued growth and performance of STS. That's been the case for some time, and we see that continuing going forward. We'll talk more about that in Investor Day and give you more insights, particularly around the ammonia story and the return on invested capital associated with that business. So I think it's a very positive outlook for that business.

Very clear. And then maybe on the GS side, more color into how you're thinking about revenue growth moving forward. Do you see the Ukraine supplementals beginning to positively affect our mass as early as Q2? Is it more second half? And maybe the other businesses breakdown of momentum in those businesses in GS?

Yes. Again, we'll give more color at Investor Day, but at a high level, I think the performance in R&S was down 12% year-on-year. We had high levels of activity in Q1 due to Ukraine, but the delayed funding impacted that. There will likely be some level of at least modest increase in activity in the European theater as a consequence of this increased funding as we move through the year, but at this point, we can't be clear which quarters it will impact. However, there's a good balance to the overall R&S portfolio with HomeSafe now starting moves again. We're being quite cautious regarding a slower ramp expected, but I think there's a good balance across that segment. Overall, we're seeing double-digit growth in GSI and similar in D&I. These are high-margin areas, which is really pleasing. S&S has grown modestly in single digits. Overall, the portfolio is performing between the 5% to 8% that we said kind of excluding HomeSafe, with some puts and takes, but I think you'll see more balance coming into R&S as the year progresses.

Our next question comes from Tobey Sommer from Truist.

I was wondering if you could comment on your customer relationship in HomeSafe and their enthusiasm and conviction for what has been a long vendor transition.

Well, I think the relationship with TRANSCOM has been terrific. Their commitment to the program and the representation to Congress regarding why they're doing this program and their phased-in cautious approach has resonated in Congress and with the folks themselves. The first moves have gone well, and the feedback from the personnel we've moved has been overwhelmingly positive. But we've got to scale that up over time. Rightfully, they are being considerate about how they do that, and we're very supportive of that. But the commitment from TRANSCOM has been unwavering, and the relationship is actually terrific, focused on this program that has effectively started and is ramping up over time. I think so far, so good.

I was also wondering if you could comment on the Mura plants and licensed plants and maybe update us on the pipeline of interested parties watching the efficacy of that process and potential sales for the company in the future?

Yes. I think we covered this a little bit earlier. I mean I think the continued delays in the Wilton site due to the availability of resources on the contractor side are likely to produce first material as we head into the next quarter. They will then get that plant commissioned and operating at full capacity as we head into late Q2 or early Q3. Impressively, the Korean facility, which we modularized the solution for, is moving far faster. This facility could come online before the one in the U.K. As the year progresses, we will see these facilities producing. The enthusiasm for the technology and actual licensing that we've sold, which is so far around 8 or 9 licenses, shows we have quite a strong pipeline looking into the future. However, as with new technology, there's always a desire to see the first facility up and running. Once that milestone is reached, it will free up market opportunity considerably as we move forward, especially later in the year and into next year. The important aspect is when we look at how we develop and bring technology into KBR, and then commercialize it through our global sales pipeline and personnel who are excellent. The returns on investment are significant. We'll highlight some test cases related back to Mura and other technologies as we progress. More details on that will be shared at Investor Day, but it's a very positive lead into the key points we want to make regarding how we commercialize technology and the value it brings to KBR and its shareholders.

Our next question comes from Bert Subin from Stifel.

I just wanted to ask about the thought process on guidance. It seems like you got off to a good start to the year. Core performance EBITDA was a little better. You've got the supplemental, which should drive some incremental improvement in R&S. It sounds like you feel pretty good about the book-to-bill across the business, and you've started repurchasing shares. Considering this, as we think about the next few quarters relative to how you were thinking about them 3 months ago, what are your insights?

Yes. I mean it's a question we debated internally for some time. We decided we would look to see how the supplementals start to flow through into next quarter. We wanted to get through our Investor Day and clarify those messages. With HomeSafe now operational, we wanted to ensure clarity on what the program ramp would look like. Although we're ahead of pace, I think we originally indicated 45% to 55%, but that now is more in balance in terms of percentages for the first half and second half. If we annualize $0.77, we arrive at something below our midpoint in our guidance. Overall, we believe it's been a fantastic start to the year. We're ahead of pace, with terrific book-to-bill rates. The business is performing well, and we will certainly review our guidance as we head into Q2. However, it was too early in Q1 to make adjustments. Our focus is on clearly explaining the business at the Investor Day and showcasing what it can do not just this year but into future years. That has been our priority in recent weeks.

Got it. That helps, Stuart. As a follow-up, I want to focus more on STS. During the Primer, you talked about Middle East growth being around 20% over the next half-decade, including significant awards in Saudi Arabia. Any updates in that area?

Bert, yes, as you will see in the Q filed shortly, the Middle East performance continues to grow significantly year-over-year, and that is our expected case forward. Relative to new awards, we have announced some, but we are subject to customer requirements on others. For some larger announcements in the market, I can only say that we are very well-positioned with those customers, and we expect to be part of many of the developments in energy security and transition in that part of the world for years to come.

Adding to that, there's a big focus on Saudi, and rightfully so, given their capital spend and their 2030 vision. We've been in that market for over 60 years, very well-positioned with established relationships and a capable workforce, including good gender balance, which is great. Saudi isn't the only story in the Middle East, though. We'll expand on this at Investor Day. We have a significant presence in the UAE as well, and companies like ADNOC are pursuing large capital spending programs. We now have over 1,000 people there, supporting Iraq from an engineering perspective as a lot of activity is occurring. We're also involved in efforts to reduce flaring and align with our sustainability mission and energy security for Iraq. Overall, we have a very strong presence across the Middle East, and the market trend is favorable for KBR.

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

I was wondering if you could dig into the growth seen in D&I and kind of where that's stemming from.

Mariana, this is Mark here. Thanks for calling today. D&I is the part of GS that focuses on higher technology, advanced space, command and control, electronic warfare, and modernization. We have a very strong IDIQ portfolio, particularly IAC MAC, and we've generated significant business from that for a long time. This vehicle is often used by agencies for RDT&E funds, which have increased quite a bit in the defense budget, considering the threats we face. The efficiency with which our customers can respond to procurement issues is bolstered by tapping the IDIQ. Space superiority drives our capabilities, from before the Centauri acquisition to now.

Interestingly, the recent budgets, while they might appear stagnant, are intertwined with broader categories like the Air Force and Intelligence, which are not publicly disclosed. Despite a perception of being flat, activity levels remain high within those budgets, and these dynamics are driving activity in that area.

Our next question comes from Sangita Jain from KeyBanc.

I just wanted to ask about your initial experience with HomeSafe. Are there any internal learnings that may change the cadence of moves for the rest of the year compared to what you guided us to last quarter?

Yes, good question. As we start to conduct actual moves, there will certainly be learnings, adjustments in the system to ensure there's enough flexibility for small and large moves, and ensuring that operations can scale to accommodate various elements within the system environment. Both ourselves and TRANSCOM are aligned to make sure the interface between the two systems is functioning effectively. A notable aspect has been that the digitally enabled system is working exceptionally well for service personnel, allowing them to register online quickly. Positive feedback is coming from those who preferred talking to a real person rather than using bots. This combination has been crucial to our learning and will continue to be important as we scale up. We have the right operational focus and engagement with TRANSCOM as well as the various services involved to ensure success.

Great. If I can follow-up with one on the LNG landscape, now that we know Plaquemines may be coming online sometime later this year, can you share your thoughts on how you could potentially backfill that backlog and what you are observing through the U.S. LNG review?

Yes. To put Plaquemines in context, these are 0.5 million tonne trains, totaling 20 million tonnes of LNG across Phase I and Phase II. Although we'll produce LNG later in the fall, it's one train after another for a while through 2026. In terms of activity levels, we are seeing considerable activity inside the DOE, examining the future of LNG with decarbonization in mind. Everyone recognizes that LNG needs to move forward, potentially with electric drives or CO2 sequestration to reduce the carbon footprint. Some projects may be reconfigured, but we are optimistic about the future of LNG in the U.S. Our cheap gas needs to be monetized, and whether it’s LNG, ammonia, or hydrogen, we see LNG as an attractive market going forward. As long as we stay relevant, I believe we will be involved in those plans. However, there is some noise suggesting softening in the market. We’ll need to observe how that plays out over the next few months.

Our next question comes from Jerry Revich from Goldman Sachs.

This is Adam on for Jerry today. Can you just update us on your ammonia prospect list? How many plants do you expect to reach a final investment decision this year? How does that compare to 2023?

Yes. The trend is obviously positive. We'll cover the ammonia story in depth at Investor Day. The EBITDA contribution opportunity to KBR, given the ammonia demand relates to fertilizers and hydrogen energy sources in the future, looks very attractive. For us, Final Investment Decision (FID) is just part of the journey when projects initiate. We get involved with licensing, basic engineering, and cost estimation. So even pre-FID, it’s quite lucrative for us. Overall, I think the ammonia market remains highly attractive, and I believe you will be pleased and perhaps surprised by the impact of a modest increase in the number of plants annually on our EBITDA. Yes, to provide some color on the M&A pipeline, our focus on technology acquisition is always present but can be challenging, as these opportunities don’t always come to market. We are more strategic in our search for smart technology. There’s internal development and protection of intellectual property, which is an essential focus. In government solutions, activity levels are increasing. While interest rates appear high and persistent, there’s more activity we’re seeing across our desks. Organic growth continues to be our priority, but if a compelling opportunity arises, we could consider acquisition, ensuring it aligns with our values and growth strategy.

Our next question comes from Michael Dudas from Vertical Research.

I'm more of a phone guy than a digital guy, as you can tell. Regarding STS, you've indicated strong book-to-bill and revenue growth, can you share how that aligns with the four phases discussed in the Primer? What impact do you foresee on EBITDA growth and margins this year and into the next?

Yes, sorry, Michael. I think what you're asking is centered on the project lifecycle across the four phases. We'll address this in greater detail at Investor Day, where we'll have Jay discuss this. In terms of our current position in that cycle, every advancement in technology paves the way for significant opportunities in later phases. Our bookings in Q1 suggest that this trend is continuing, providing us with enticing long-term business opportunities. We aim to convey the noncyclical nature of this business at the Investor Day and how we’re seeing this trend particularly in what we now refer to as the Global South, whereby growth is surpassing that of the Northern Hemisphere.

Our next question comes from Gautam Khanna from TD Cowen, but we are currently not receiving any audio from him. We have no further questions in the queue. So I will hand back over to Stuart Bradie for any closing remarks.

Thank you. Thank you, Drew. To close out, it was a brief call today given our upcoming Investor Day. We had an incredibly clean quarter and a strong start to the year. Key takeaways are continued momentum in STS, strong margin performance across the businesses, exceptional performance in government solutions, and notable milestones with HomeSafe and successful first moves. The Ukrainian supplemental funding looks positive heading into the latter part of the year. Overall, it’s been a strong start, setting us up nicely for the Investor Day, and we look forward to seeing everyone in New York.

That concludes today's call. You may now disconnect your lines.