Earnings Call Transcript - KBR Q3 2024

Operator, Operator

Good morning, everyone, and welcome to KBR’s Third Quarter 2024 Earnings Conference Call. My name is Emily, and I will be coordinating your call today. After the presentation, there will be the opportunity for you to ask any questions. I will now turn the call over to our host, Jamie DuBray, Vice President of Investor Relations. Please go ahead, Jamie.

Jamie DuBray, VP of Investor Relations

Thank you, Emily. Good morning and welcome to KBR’s third 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 Investor 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, CEO

Thank you, Jamie, and welcome to our third quarter earnings presentation. I would like to start on Slide 4 if I may. Now we show that on every earnings presentation, so no surprise. It lays out our Zero Harm program and the pillars both environmental and social that underpin that program. The progress we’ve made in each of these pillars is highlighted in our Annual Sustainability Report, which takes me nicely on to Slide 5. So this month, we issued our 2023 Sustainability Report. The team does an amazing job in showcasing all that we are doing across these pillars. We’ve shown only a few highlights on the slide here, and I'll pick up on a few. Our health and safety performance is once again in the top quintile, really demonstrating our commitment to looking after our people. 37% of KBR Group's 2023 revenue, actually over $2.5 billion, is directly linked to sustainability. This shows clear alignment with shareholder value, which we previously discussed is a clear differentiator for KBR. The result from our people survey, run by an independent company and conducted anonymously, classified KBR as a great place to work in multiple countries. The survey demonstrated our focus on people is truly making a difference, though of course, we are not perfect and still have a lot to do. On the side of the slide, you will see our continued commitment to strong governance. We continue to make progress in Inclusion and Diversity, advancing our agenda on multiple fronts. Our maturity and commitment to sustainability have been externally scored by various agencies. We believe MSCI is the most cited, and we are delighted to have achieved for the second consecutive year their very highest ranking of Triple A. These are only a few highlights, and I encourage you, if you have time, to have a look at the full document on our website. Now, on to Slide 6. We have good financial highlights for the quarter. This was another clean quarter and frankly another set of terrific and consistent results. Group revenue was up double-digit at 10% year-on-year. Adjusted EBITDA increased 18% over the same period, demonstrating our focus and discipline in delivering on our strategy to win the right work and executing with excellence while managing costs prudently. This has resulted, as you would expect, in enhanced margins, which were up 70 basis points. Cash was once again a standout, with year-to-date conversion at 129%, an absolutely spectacular performance. On to book-to-bill. We have been providing a book-to-bill figure excluding the Plaquemines project for the last several quarters, in order to convey underlying business performance without the large LNG burn. Beginning this quarter, we will switch to only using this figure in our materials, especially in light of the new joint venture with Technip, which I will cover in a moment. On this basis, I'm really pleased to report that our book-to-bill at group level was 1.2x in the quarter, and both STS and GS in particular had strong quarters. This sets us up well to close out the year, and together with our attractive pipeline, gives the Group a solid foundation heading into 2025, increasing our confidence to achieve industry-leading long-term targets. I would like to publicly recognize and thank our people all across the world who continue to deliver every day, doing what matters most. Without them, these results would not be possible. We closed on the LinQuest acquisition, and I'm pleased to report that the integration is well underway, with the expected alignment in values and culture shining through. We've had numerous Town Hall meetings with LinQuest employees all over the country, and we could not be more pleased with their warm reception to KBR. Their deep domain expertise and outstanding technical capability, along with their dedication to serve the mission of the customer, is 100% aligned with how we operate: doing things that matter. Lastly, I'm pleased to report that we will be increasing our guidance for revenue, adjusted EBITDA, and adjusted EPS this year to reflect the addition of LinQuest and our ongoing strong organic performance. Now on to Slide 7 for some key awards. Let me start with STS and Saudi Arabia. There has been quite a bit of speculation on this, and we're now in a position to talk about a role in the liquid to chemicals project for Aramco LTC. Previously, we discussed the multiple world-scale projects for olefin crackers where initially tendered Front End Design and PMC project management contracts; plus there was an overarching coordinating project management contract for CPMC. KBR won one of the crackers and the overarching CPMC. This was the maximum any single company could secure. However, the cracker project that KBR secured was actually suspended due to competing Aramco’s priorities, and this has been made public. The CPMC, we believe, is the key role here. This is a multi-year endeavor employing critical resources across all olefin projects at various stages, involving integrated schedule management, supply chain strategies, data and digital management, and focusing on safety systems and the digitalization of those systems while serving as the project-wide technical authority. We will have teams embedded in each of the pre-FEED CPMC contractors during the other large projects on behalf of Aramco. This will ramp up progressively through the rest of this year and into 2025, and as a matter of fact, will continue well beyond our long-term targets. Revenue through the pre-FEED will be between $50 million to $100 million, and as we move through FEED and into execution, revenue will be several times this amount, making it quite significant. Moreover, we have secured another offshore gas development Front End Design from Aramco, marking the third such project to date, which is an important piece of work setting us up well for 2025 and a significant contribution to our long-term targets. To remind you, Aramco is replacing crude with gas to generate power, which will then contribute to various petrochemical outputs through the LTC program, significantly reducing the carbon footprint of energy production in the Kingdom. Now let me turn to LNG, again with some speculation surrounding this market. Firstly on Plaquemines, we expect first LNG to be one of the industry benchmarks for speed to market. Further LNG will commence production as the individual smaller trains are progressively commissioned through 2025 and into 2026. In the quarter, we secured the Lake Charles project in joint venture with Technip. This partnership has a proven history of successful collaboration, resulting in strong construction and fabrication capabilities. The customer is Energy Transfer, and the contract terms are firmly aligned with our stated risk profile. KBR will be performing management and technical services similar to our role on Plaquemines. Like Plaquemines, this will be reported through equity in earnings. Energy Transfer is making solid progress on offtakes and has the balance sheet to move the project forward to final investment decision; in fact, they have already placed long lead orders. That said, we still have some work to do, and I think the upcoming election will impact the timing. We do not expect FID until the second half of 2025. In addition, we secured the Front End Design for another LNG train from a confidential LNG producer in the Middle East, which could lead to larger segments as that project progresses. We also secured the project management contract for ADNOC, the Abu Dhabi National Oil Company, for their new LNG project in Abu Dhabi. This is for the execution phase and is valued at approximately $130 million, following a successful Front End Design PMC completed earlier this year. Lastly, we just announced the award of the Shell Manatee gas project in Trinidad, which is crucial for LNG development in that part of the world. LNG is a global business that provides KBR with numerous opportunities aligned with our risk profile and leveraging our differentiated capabilities. Now let me shift to emerging technology areas. We announced our acquisition of Sustainable Aviation Fuel Technology early in 2024, and since then, we have digitalized and modernized the technology while ensuring we can deliver an end-to-end solution. This solution is now trademarked as Fuel (SAF) and is the first AFTM SAF certified SAF technology. We're particularly excited about what's to come as we're now at an intersection of increased demand, supportive legislation globally, and progressive incentives. The project with Avina is the first in an exciting pipeline of opportunities, with more to come through 2025. Regarding circularity and specifically our investment in Mura Hydro-PRT Plastics recycling technology, I personally visited the site in the UK at Wilton and saw the progress firsthand recently. Commissioning is well advanced, and although progress was impacted by skilled labor shortages mainly due to Brexit, the plant is set to produce product before the year ends. The LG Chemicals plant in Korea, our first modular solution, is on the same timetable, with the Mitsubishi plant in Japan looking to produce products in early 2025. We believe that having the first at-scale plant is terrific, but operating three at-scale plants will truly catalyze new licenses and partnership opportunities in 2025 and beyond. This is very, very exciting for us. STS book-to-bill was 1.0 in the quarter, but this does not include the large ADNOC LNG PMC I referred to earlier, which was signed a few days after the quarter closed and will be recorded in Q4. Given this and what's in the pipeline, we expect Q4 to be a strong booking quarter for STS. Turning to government solutions, as expected, Q3 showed strong bookings due to Department of Defense annual budget cycles. Our international business also had a great quarter, achieving a book-to-bill of 1.3x for the quarter and 1.1 on a trailing 12-month basis. Some highlights include nine awards in our Systems Engineering business via the IAC MAC Contract Vehicles we've discussed many times. This year, we were awarded approximately $1.5 billion in task orders under that contract, with $1.2 billion of which were awarded in Q3. We book only the backlog that is funded, and the $1.2 billion in this quarter reflects the ceiling value of those combined contracts that we expect to book and burn over time. One significant contract worth highlighting from that $1.2 billion is a new digital customer for KBR, a multi-year contract worth around $200 million supporting the Naval Warfare Center Pacific program, where we will play a crucial role in introducing and testing new technology as we progress digital transformation and a zero-trust environment for that customer. In space, a key strategic vector for KBR, we have continued momentum with a follow-on strategic award from the Naval Research Lab. The acquisition of LinQuest was made to accelerate our growth in military space, interoperability, and digital engineering. In the months since we've closed the acquisition, LinQuest has secured over $60 million in new orders under a unique contract vehicle that KBR does not currently utilize. Since LinQuest now can leverage each other’s contract vehicles, the revenue synergy opportunities are exciting due to quick procurement cycles. Before I conclude, I would be remiss if I did not provide a HomeSafe update. Systems testing for the interstate moves were successful, and moves have now commenced. This is a significant milestone that clears the way for domestic moves to proceed. While we expect to see an increase in moves in Q4 as new lanes are activated, revenue for the full year 2024 will be below our expectations. However, there's no impact on profit, as we were conservative in our original projections for 2024. Our long-term targets include a conservative ramp as presented at Investor Day. Therefore, the lower volume in 2024 will not affect our targets. Our solid relationship with TRANSCOM continues to be collaborative, and we look forward to progressively ramping up the program and enhancing the moving experience for our service members and their families through 2025 and beyond. I will now hand over to Mark, who will take you through the Q3 performance in detail, including the 2024 guidance increase.

Mark Sopp, CFO

Terrific. Thank you, Stuart, and good day, everyone. I'll pick it up on Slide 9. As you've heard from Stuart, the results for Q3 were really good across the board, with every single metric showing double-digit increases over last year. Margins and cash flow were particularly highlighted, with profitability running consistently in the mid-11% range all year, and cash flow performing exceptionally well at $422 million on a year-to-date basis. DSOs, or days sales outstanding, continued to run at the lowest levels we have ever seen at KBR, averaging about 60 days through this year so far. Low DSOs reflect high customer satisfaction and, importantly, superb teamwork across our operations and customer touch points. Let me quickly move on to Slide 10 for results of the segments. On the left, STS is humming along with continued good momentum and superb profit growth, consistently above the 20% margin level. As mentioned, this team does a remarkable job delivering intellectual property capabilities to customers globally while expanding its services platform with very attractive margins. On the right, Government Solutions also had an excellent quarter, with revenues up 11% and profit up 14% due to improved margins. There was increased award decision-making in the US, many of which came in our favor, yielding an over 50% win rate on awards, reflecting great team effort. Now on to Slide 11 and capital matters. As stated earlier, cash flow generation has been outstanding, enabling deleveraging in September following the LinQuest acquisition, which closed in August. Stepping back, it's terrific to have made such a sizable and high-quality acquisition like LinQuest, deploy about a quarter of a billion in buybacks and dividends year-to-date, while still maintaining a leverage ratio well below three times. This underscores the power of our EBITDA growth and cash generation. It's worth noting we received a credit upgrade along with the LinQuest deal, with all agencies now at Double B plus rating equivalents. This, combined with the quality of the acquisition, allowed us to lower the borrowing rate on both the new debt associated with the deal and existing debt. We added committed liquidity and extended maturities, which will help contain interest costs and provide more deployment options going forward. All forms of capital deployment—spanning M&A, buybacks, and debt reduction—deliver benefits to us, and we will balance these efforts based on what generates the most attractive long-term value for our shareholders. Now, I’ll finish up with Slide 12 and our forward view of guidance. Our guidance for 2024 is consistent with the information we provided in the acquisition announcement. We are moderately increasing our revenue guidance to $7.5 billion to $7.7 billion, reflecting four months of LinQuest in this year’s results and accounting for lower top-line contribution from HomeSafe. On the profit side, the strong year-to-date results plus the addition of LinQuest allow us to raise our adjusted EBITDA guidance range to $840 million to $870 million. For EPS, the net effect of the LinQuest EBITDA contribution and the incremental interest that stems from the transaction enables a moderate increase to the adjusted EPS guidance, raising the floor to a range of $3.20 to $3.30. We maintain the original cash flow range of $460 million to $480 million. To wrap it up, this quarter was marked by well-rounded execution across program delivery, winning new work, generating cash flow, and integrating LinQuest, which also improved our capital structure for better earnings production and future deployment flexibility as we look toward 2025 and beyond. Thanks everyone for tuning in this morning. I’ll turn it back over to Stuart.

Stuart Bradie, CEO

Thanks Mark. Terrific job as always. I will finish off on Slide 13 with some key takeaways. As Mark and I mentioned earlier, we had an outstanding third-quarter performance with double-digit year-over-year growth across all key metrics: revenue, profit, and operating cash flow. This is absolutely terrific. Regarding LinQuest, it has performed well since closing, winning over $60 million in new work and displaying solid September results. Most importantly, integration is progressing exceptionally well, with revenue synergy opportunities crystallizing, making this acquisition very exciting indeed. Thanks to our strong year-to-date performance, along with the addition of LinQuest, we're raising our guidance on revenue, adjusted EBITDA, and adjusted EPS as Mark discussed. Lastly, our book-to-bill at the Group level was 1.2 times, and our attractive pipeline sets us up nicely for the remainder of this year, providing momentum going into 2025. Thank you again for joining us on today's call. I’ll now pass it back to Emily, who will open the call for questions. Thank you.

Operator, Operator

Thank you. Our first question comes from Andy Kaplowitz with Citi. Please go ahead, Andy.

Andy Kaplowitz, Analyst

Hey, good morning, everyone.

Stuart Bradie, CEO

Hi Andy.

Andy Kaplowitz, Analyst

Stuart or Mark, I know it's a bit early to talk. Good morning. I know it’s a bit early to discuss 2025, but could you provide us a little more color into visibility, particularly in STS, growing in line with that algorithm you discussed earlier this year regarding the 11% to 15% revenue growth? It looks like the trailing 12-month book-to-bill reaccelerated a bit in Q3. You mentioned strong expected Q4 as well. Last quarter, I think you mentioned some delays in energy transition projects. Are you still seeing those delays, and how do you feel about the sustainability of the 1.0 book-to-bill you recorded in Q3 moving forward?

Stuart Bradie, CEO

You have a lot of questions in one there, Andy. I would say that it's still quite early; we have obviously started our budgets for next year. I think that we are confident in our alignment with the 11% to 15% growth expectations in STS going into next year. Our book-to-bill clearly picked up in Q3, and it’s looking strong in Q4 to underpin that. The margin performance continues to be very strong. I think for energy transition projects, we are seeing increased activity in the Middle East, particularly around market share in ammonia and green hydrogen. However, a lot will depend on the election results in the U.S. Overall, the energy security market, combined with sustained energy transition efforts—although likely slower than we initially anticipated—still provides us good confidence to meet the targets presented at Investor Day.

Andy Kaplowitz, Analyst

It does, Stuart. And Mark, I want to ask about the guidance in the context of LinQuest. You noted there's an offset from HomeSafe. Looking at the guidance raise, is there anything else that's moving slower than expected, or would you say that LinQuest is generally sizable in bringing about a boost to the guidance change?

Mark Sopp, CFO

Thanks, Andy. Just to clarify, while HomeSafe is an offset to LinQuest's revenues, we did not really factor in profits from HomeSafe as Stuart indicated. So that doesn’t contribute to your question related to Q4 and the guidance. We didn’t include HomeSafe’s profits in our projection. Additionally, we do have interest expense associated with LinQuest. The good news is that we have three full months of LinQuest now, but we also have three months of interest expenses. While LinQuest is accretive, it’s just a few cents impact on the bottom line, and we didn’t see this as justifying a major guidance bump. We are cautious in our approach this quarter, given some seasonal factors affecting our labor efficiency due to the holidays.

Stuart Bradie, CEO

Just to finish off, Andy, regarding EBITDA guidance, we estimate that LinQuest will contribute approximately $175 million, generating about a $17 million EBITDA return. That’s actually the amount reflected in this announcement, which is completely consistent.

Jasper Bibb, Analyst

Hey, good morning, everyone. This is Jasper Bibb on for Tobey. A lot of exciting wins in STS; I'm curious how you think some of these LNG recycling wins and the mix will impact the segment margins over the next couple of years, especially with the flattish margins outlined at your Investor Day this spring.

Stuart Bradie, CEO

I think we will aim to maintain margins in the 20% range while the business grows at a rate of 11% to 15%, which are the targets we’ve set and will continue to uphold. Of course, there may be some margin volatility related to mix; however, we believe our overall guidance remains steady as we aim for long-term targets by 2027.

Jasper Bibb, Analyst

Thanks. Another follow up on HomeSafe: It's good to hear no impact to your targets from some of the spikes there. Can you clarify whether it’s still on plan with the underlying 2025 assumptions for HomeSafe revenue from your Investor Day, or is that now a bit below plan and balanced out by other wins across your portfolio, including LinQuest?

Stuart Bradie, CEO

No, it's very much on target. As I mentioned in my prepared remarks, we took a conservative view through 2025, 2026, and 2027. In fact, now that we’ve opened up the aperture for domestic moves, with successful systems testing, I believe there is potential for an upside surprise, but we retain conservative estimates in line with our long-term targets we presented at Investor Day. More will emerge as we guide for 2025 and beyond.

Michael Dudas, Analyst

With the positive progress you mentioned on energy projects in the Middle East, particularly in Saudi Arabia, could you elaborate on the workforce aspect and how it will be structured through 2024? Additionally, given current opportunities, do you anticipate further contractor bookings over the next 12 to 18 months in LNG or related areas?

Stuart Bradie, CEO

That's a great question, Mike. For the LTC program, it will be led primarily from our Houston Office, with support from our Saudi office, while the gas development projects offshore will be led from our Leatherhead office, again with cooperation from Saudi and Chennai. The LNG projects are managed from Houston or Leatherhead, again, supported by our India office. This approach allows us to mitigate concentration risk. I’d also add that being involved early in projects significantly enhances our potential for further roles, so we focus heavily on pre-FEED and FEED projects to position ourselves effectively.

Michael Dudas, Analyst

That makes sense. My follow-up is regarding your comments on energy transition opportunities. Any shifts in your stance based on your robust Government Solutions units regarding what you are observing at the Pentagon or potential changes anticipated due to elections?

Stuart Bradie, CEO

I don't foresee any major changes, Mike. The strong bipartisan support for military spending and the DoD budgets remains a priority, regardless of election outcomes. We're positioned well in military space, the Pacific, hypersonics, and civil space with NASA, which should receive strong support irrespective of political shifts.

Steven Fisher, Analyst

Stuart, regarding the potential election impacts on Lake Charles, could you share scenarios that might arise and their timing implications? I sensed from your response to Andy that even if Lake Charles experiences delays, you might still have enough work in STS to meet the 11% to 15% targets—you can clarify if that's accurate?

Stuart Bradie, CEO

In terms of our ability to look further ahead at projects and our pipeline, I think we have enough momentum and bookings to ensure that we can deliver these targets regardless of potential timing changes with Lake Charles. Energy demand continues to increase globally, providing us with a strong opportunity set that we expect to realize in the near term.

Steven Fisher, Analyst

That’s terrific. One last question regarding Saudi. Could you share how fluid the program situation is? Is the PMC contract somewhat locked in now, or do you see room for changes either positively or negatively? You’ve mentioned other opportunities, but is this PMC contract now secure?

Stuart Bradie, CEO

While the final investment decision from Aramco will depend on EPC pricing once front-end designs are completed, we have strong confidence in this PMC contract, which could solidify our extensive involvement. We will not book this into the backlog until we reach the various milestone gates; however, we are committed to delivering on these opportunities.

Jerry Revich, Analyst

If we take a step back, 5-6 years ago, the risk profiles for many LNG projects weren’t appealing. However, your win rates have improved significantly, including for Lake Charles LNG. What's changed due to industry discipline that has led to such favorable conditions for you in terms of risk and win rates?

Stuart Bradie, CEO

We've maintained our stance on not taking lump sum EPC risks. Significant modeling with VG regarding their success in the first phase of Plaquemines has led us to engage differently with new customers, allowing them to manage risks effectively on their end, keeping us actively involved without exposing ourselves to undue risks. The Middle East offers us similar opportunities with focus on project management contracts and FEED work, which perfectly aligns with our risk profile.

Jerry Revich, Analyst

Can you discuss the Heritage Tech pipeline, particularly expectations for bookings in ammonia and plastic recycling over the next couple of quarters? Is there substantial visibility on the pipeline?

Stuart Bradie, CEO

While we have a robust pipeline for plastics recycling and ammonia sectors, the momentum for final investment decisions hinges on our outcomes at Wilton, Korea, and Japan. This will directly influence bookings expected later this year and into 2025. We're optimistic about the progress we are seeing.

Sangita Jain, Analyst

Regarding the LTC project, if Aramco were to shift some investments to Asia, could you seamlessly support them for similar projects?

Stuart Bradie, CEO

In theory, yes, it depends on the contractual structure. We have offices in Asia that can provide support for such endeavors. Historically, more investments have been directed into China and increasingly into India. However, I don’t expect any drastic shifts, as they seem committed to decarbonizing in the Kingdom. Their focus is on utilizing gas for power generation while maximizing crude's utility in petrochemical production.

Sangita Jain, Analyst

I know you've referenced long-term guidance multiple times, but what are your thoughts on long-term guidance without the LTC project included?

Stuart Bradie, CEO

The LTC project remains significant within our guidance as we have a pronounced role within the CPMC environment, which aligns with our multi-year targets. Our longstanding relationship with Aramco and being chosen to deliver these initiatives indicates the strength of our capability, leading to strong expectations for this multi-year program.

Gautam Khanna, Analyst

Good morning, everyone. I was curious about LinQuest and any small business set-aside work they might have. Can you quantify their small business awards?

Stuart Bradie, CEO

They don't really have any small business set-aside work. Our intent with the acquisition did not include that feature.

Mark Sopp, CFO

To clarify, the work we mention relates to SBIR 3, which isn't restricted to small businesses. The contracts are open to all enterprises, allowing flexible funding for technologies that have initially been developed in smaller formats.

Gautam Khanna, Analyst

Thank you, that's helpful. On the continuing resolution—what do you expect for bookings in the next couple of quarters if the CR extends?

Stuart Bradie, CEO

We have enough opportunities in our pipeline that we're observing. We expect strong bookings to remain solid, but some delays are possible due to the extended resolution. However, this should not significantly alter our guidance for the coming year.

Operator, Operator

At this time, we have no further questions. I will hand the call back to Stuart Bradie for final remarks.

Stuart Bradie, CEO

Thank you, Emily, and thank you again for listening and for your interest in KBR. We had another terrific quarter with double-digit growth across all key metrics. It's not just about revenue; it's about delivering that revenue into greater profit with enhanced margins. Thank you again, and we look forward to our future calls throughout today and the coming times.

Operator, Operator

Thank you, everyone for joining us today. This concludes our call, and you may now disconnect your lines.