KBR, Inc.
Q1 2021 Earnings Call Transcript

Published: 29 Apr 2021

[Operator:]

Good day, and welcome to KBR Inc. First Quarter 2021 Earnings Conference Call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introductions, I would now like to turn the call over to Ms. Alison Vasquez, Please go ahead, ma'am.

[Alison Vasquez:]

Good morning and thank you for attending KBR's first quarter 2021 earnings call. Joining us today are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your question. Today's earnings presentation is available on the Investors section of our website at kbr.com.

[Stuart Bradie:]

Thanks Alison, and many thanks for joining us today. I will start on Slide 4. Now you should all be very familiar with those Zero Harm sustainability program by now under 10 pillars that fit within it across the ESG spectrum. At our recent Investor Day, we highlighted that being a good corporate citizen was the floor and not the ceiling at KBR, and I wanted to prove on that side a little bit more today. The symbiotic relationship between shareholder value and KBR helping our clients achieve their sustainability goals is an absolutely key differentiator for KBR. And we wanted to build on that just a little on to Slide 5. KBR has a suite of recycling technologies that enable secular processing and the broader secular economy. At the Investor Day, Dow introduced Mura'srevolutionaryHydroPRS technology that closes the loop on the secular plastics economy. This is very exciting on its own right and this excitement I think was compounded with the recent announcement that Dow is also investing unimportantly committing to off-take. This obviously is a huge endorsement on the sustainability aspects and of course, a huge endorsement on the technology itself and is an important step forward. But at KBR, we have many recycling technologies as outlined on the slide. All are proprietary, differentiated, disruptive and market-leading. And we could spend the entire call and I don't plan to do that talking about these technologies. But today I'll highlight just one example to give you a flavor and that's on sustainable fibers. Our global retailer from Scandinavia came to a few years ago to help them solve a big problem. How to recover valuable chemicals and water from what would have been a waste stream at the end of their process to produce manmade fibers. Our sustainable technology team applied our proven of operation on crystallization technology to essentially recover and purify critical ingredients and water such that they can be reintroduced right at the front of the process. Closing the loop on the secular processing. And this solution has many benefits as I'm sure you can appreciate, it reduces processing cost, it saves finite elemental resources and water, and it eliminates a wasting. So overall it's great value for the client. Obviously for KBR and our shareholders and of course the planet. So like you've heard me say before, advancing our clients' ESG objectives, its core to KBR strategy and this example is just one of the many that demonstrates that tenant.

[Mark Sopp:]

Awesome Stuart, thank you. I will pick up on Slide 11. So as you just heard, Q1 performance was generally in line with our 2021 guidance expectations and also our long range targets that we presented to you last month in our Investor Day. Revenues of $1.5 billion and $135 million of adjusted EBITDA are right in line with our fiscal 2021 guide of $6 billion top-line and 9% EBITDA margin. Cash was once again very strong out of the gate with free cash flow conversion coming in at 109% for the quarter. Stuart also said it was particularly encouraging is the quality of the work that's coming in, in new orders. We are winning high technology content defense, research and development and modernization contracts in line with our upmarket strategy. Trusted microelectronics, rapid research and development and prototyping and others that Stuart cited earlier and also in our release are really good examples. These programs are high priority high barrier to entry and in some cases leverageable to greater opportunities in the future. The same is true in sustainable tech a stellar quarter in bookings for proprietary process technologies, including strong bookings across our new disruptive sustainability focus technologies like you heard from Stuart K-COT, K-PRO and K-SAAT and measured progress on energy transition advisory and smart operations and maintenance awards. As I'll cover later, we did have some acceleration of profit in the first quarter, which were modestly relate our first half to second half earnings more toward the 45%, 55% mix versus our initial guide of 40%, 60%, but the bottom line here is, we are on track on all measures and thus reaffirming our guidance for the year.

[Stuart Bradie:]

Thanks, Mark and great job. And on to our final slide, Slide 15. Our people continue to deliver, they really do an execution was again exemplary and we started 2021 well, a super strong performance across the entire business. Cash conversion, really important was again terrific and our balance sheet and liquidity position as Mark demonstrated our both healthy. The circa 80% eight zero percent of the work secured to deliver our 2021 guide under the strong Q1 now behind us, we are very confident of delivering 2021 and we reaffirm that guidance today. Now remember that guidance reflects a 20% plus increase in adjusted EPS from a very, very resilient 20 actual. As we reiterated at Investor Day, we continually endeavor to do that simple thing doing what we said we would do. So thank you for listening and I'll now hand it back to the operator who will open the call up for questions.

[Operator:]

We will now take our first question from Gautam of Cowen & Company. Please go ahead.

[Dan Charney:]

This is Dan on for Gautam. Good morning. And okay, so our question was - have you seen any exciting opportunities or threats just in the initial budget proposal that came through in terms of like agencies?

[Stuart Bradie:]

Yes, we could tried to cover that off in the presentation somewhat on an Investor Day that we. So no real surprises, no red flags and in fact quite the opposite. I think we were very pleased with the levels of budget and I think the priorities didn't through our anything that disrupted our strategic advancement. And so that's why we're very bullish about our future and so I think in short, no real surprises at all, I think outside of the DoD obviously retiring momentum and think last particularly around sustainability as well, and of course last nice presidential address as well, putting more money to work in the economy is just good news. And I think we are very well positioned to take advantage of that across the spectrum of what we do, which again is why we're so bullish. So no red flags only more encouragement I would say is a short way to describe your question.

[Mark Sopp:]

Dan I'll just add into that to Stuart remarks. If you go back to the post-election moments in time there is certainly with some concern about whether or not the new administration would continue to support NASA that had some nice increases during the Trump administration and we're really pleased to see a further bump up of 6.5% in the request for NASA across the Board and ongoing support for human space flight missions to the moon and longer-term beyond. So that part was particularly strong in addition to Stuart remarks as well.

[Dan Charney:]

Great, that's really helpful. Thank you. And then just quickly it currently seems like multiples on the government IT space of really compressed less KBR's you guys had a nice run recently, and I'm wondering how does that inform kind of a balance between M&A versus repo and whether you guys have seen kind of the M&A pipeline become more active as a result of that for more affordable?

[Stuart Bradie:]

Yes, I mean obviously if your share price goes up then if you're using that as currency things become more affordable. But I think there's good recognition in the marketplace that KBR has changed significantly over time. And I think we're getting recognition for whether we actually do today. We don't think our targets that we're reaffirming and obviously drive greater share price accumulation through time our EPS performance and hopefully that reflects a share price accumulation over time as we laid out on Investor Day. In terms of the way that we think about the business, we do think we have - today a very high-end government business, but we do have this unique technology sustainable technology kicker that is arguably should be valued at higher multiples than government on that. So I think that's certainly excitement around marketplace as you're well aware. So in term - and I think back end across hopefully strongly and invested in has really supported the run-up that we had recently. And in terms of the M&A market certainly, there is still obviously lots of activity there that consolidation will continue and, but we have been very clear about our priorities in terms of how we’re looking across our capital spectrum and I think Mark laid those out. So I don't think there is any change there at all. And just to reiterate, if we will fund organic growth and we've got really strong growth if you had 20% plus an EPS level built into our guide and that's the best use of cash. We've got increasing dividend and then of course if we can find accretive M&A that fits our strategic feature and accelerators into new areas and we want to acquire just to bulk up after market share per se and things that we already do, we think we can do organically. So it would be - it has to be a cultural fit and it would have to be accretive and so you have to get all these things, right. And if that doesn't occur, then obviously we'll be looking at. We've got excess cash, obviously our leverage targets as we did end of last year, we will look at buying back our own stock, no doubt about it.

[Operator:]

We will now take our next question from Michael at Vertical Research. Please go ahead.

[Michael Dudas:]

Two questions, first, maybe for Mark. Certainly, you're talking about with these new businesses in upmarket and margins. Could you maybe reflect on, say what the overall backlog margin say GS and maybe with this new STS was 6, 9 months ago where it is today. Is it going to continue to move at a steady pace. So as you execute those margins will flow timely for meeting your targets over the next couple of years, it seems that you're getting to high end bookings sort of lot greater pace than that we've seen in the recent quarter.

[Mark Sopp:]

Thanks, Mike. And we're really pleased with the quality of work as we've repeated over and over again. In some cases that's rewarded in strong margins and in cases such as NASA as I think everybody knows to a lesser degree given the nature of economics and that agency and what others face with us and we do so proudly and it's all good. And so we see balance in the bookings that are yes up market, but across the different mix of agencies both in the U.S. and internationally. As you know, the international piece is favorable to margins, parts of the domestic are favorable to margins like Centauri and the trusted microelectronics and the rapid prototyping and their continued great work we do with NASA tends to go the other direction, and I would tell you that the bookings we recently had in the pipeline we have suggests a static sort of scenario in the margin 10%. Hopefully, a little bit more territory and if that waiting changes will of course let you know. But right now all signs indicate to a stability set of circumstances on the margin front for government.

[Michael Dudas:]

I appreciate that. And next follow-up is for Stuart. So we've been getting from clients certainly perhaps since your Investor Day. The opportunities and certainly excitement on ammonia and hydrogen certainly and the opportunity there is given what you reported here in some of the refining and chemical processes that been working well with these new technologies over the last say 12 months if be instituted. I mean getting some traction. Could you maybe share is height is ammonia, in that same realm you think that's a 12, 18, 24 months story or are we going to see some activity much quicker. I would think your clients are certainly asking you whole bunch of questions on and how this could work through especially with your leadership in that space.

[Stuart Bradie:]

Yes, good question. On Mark's answer on margins, I think what we're seeing of course on what was heritage tech, which is I think everyone knows is a very high margin component of STS and the cadence of bookings with another book-to-bill above 1.5 and this quarter versus in Q4 in Q3, in Q2 were all well above one is just I think that's going to help drive margins upwards because as we look at the mix in STS as we go forward. So I just wanted to put that out there, because that is exciting and if we can keep that level of activity in that cadence going then, then clearly that puts up the pressure on margins, which obviously is good for everyone. In terms of the discussion on ammonia and hydrogen. Yes, of course, it's hugely acutely positive and I think Mark and myself. We mentioned the cadence in the advisory business talking about energy transition and bringing the technologies which includes hygiene of course as part of that solution. So very much the tip of the spear, there are lots of awards and studies ongoing and we expect I mean not all of them will prove out to be bigger opportunities but lots well. And I think that really puts a lot of credibility on player in the market is heading and in terms of ammonia demand. We expect that to continue increasing over time. We've got a lot of activity in a lot of bids in the pipeline for that. I think we'll start to see some of them come through in the second half of the year. And on the cadence of that will continue. And the reason for that I think people, takes two, three years to build these large ammonia facilities. And I think you can see the hydrogen demand with ammonia being of course, the fuel the transportation fuel for hydrogen and that demand growing and people were trying to get ahead of that and certainly with discussions with big ammonia producers have already started and a few being involved in any of their sort of investor base a dialog I mean not very, very clear. So I think it all stacks up and really favorably for KBR. I think the drive for refining to be greener and our suite of green technologies we can apply to refineries to help them the product mix of options. We can give on terms of driving value for our petrochemical producers around things using K-COT and actually delivering more propylene than traditional ethylene propylene mixes again highly attractive. And so I think, you're seeing a little bit of a perfect storm across our portfolio and we’re at pains not to just talk about ammonia and hydrogen in this call because that - it takes a, there's a lot of activity there and people get worked up and down by that and rightfully so. But I want to just to make sure that we've got the message of across on this call that we got a suite of technologies over 70, seven zero technologies that are being deployed actively across the green refining area, the petrochemical piece and of course in the syngas ammonia piece for the hydrogen future. So I think, more to come on that Mike and I'm sure as we get into Q2, Q3, Q4 of this year you will start to talk more about awards in that arena.

[Operator:]

We will now take our next question from Tobey at Truist Securities. Please go ahead.

[Tobey Sommer:]

Thank you. With respect to the pipeline in kind of bid activity in fact is that - is that top of funnel kind of increasing as one might expect with some of these headlines and momentum. And what do you, what's the outlook for contract size given some of the developments that you've talked about so far on the call.

[Stuart Bradie:]

Yes, I don’t think it’s kind of just too much in terms of change in size per se. The size of awards from a technology perspective, they haven't really changed too much over time. I think the important piece they come with very strong cash conversion dynamics and attributes and you've got the sort of high margin profile as we've discussed in the past. So, not really big size changes there. But the opportunity as I've just said would really be in the sort of perfect storm at the moment is of course growing. So the pipeline of opportunity is sizable and we're seeing that across all the areas in STS. And so it's not just in one area and hopefully that came across in the presentation today. So we're feeling really positive about our business and that's why we're very confident our statements about what achieving $1 billion plus in revenue and the key margins this year. And as Mark stated the longer term, longer term targets are also looking good and if you think about if you remember the detail on STS that has a growing margin profile as well as growing revenue. So it's a double whammy as they say, so it's a, that's all looking very positive in the pipeline of opportunity we support that.

[Tobey Sommer:]

Thank you. My follow-up question has to do with sort of the exposure you have to OPTEMPO via LOGCAP. How - what is the outlook for that to rebound to levels of a couple years ago. Understand we've got some news on it for Afghanistan, but to some degree OPTEMPO may be tied to the pandemic and COVID cases? Could you speak to that over sort of more of a medium term? Thank you.

[Stuart Bradie:]

Yes, for taking question to answer Tobey, I think we'd all be guessing. I think the important take away from what we're doing in our Readiness & Sustainment segment well as LOGCAP that of course is that we had 15% organic growth. And with actually work happening mostly in the U.S. and a bit internationally, but not really in that Middle East OCO arena. So I think that's really the key takeaway in that segment for this quarter. And once things become clear obviously we'll report back. I'm very upbeat about that segment and really GS in general. And I'm particularly happy the fact that we took a very conservative and prudent approach to that arena as part of our sort of future guidance and our outlook and we've taken away any sort of volatility and our performance as a consequence. So I think we’ll report back when things become clear. There are, there is potentially of course upside associated with that as things become clear, but maybe not necessarily so but we will be guessing if we said anything I think I'd rather not guess I'd rather tell you when we know the fact.

[Operator:]

So we will now take our next question from Andy at Citigroup. Please go ahead.

[Andy Kaplowitz:]

Sorry if this question is already been answered joined the call a little late, but just - on the defense side of the business international defense. You mentioned the decline in Q1 was primarily attributable to project completed. How do you see that end market trending over the rest of the year and going forward? It was strong shrunk for you most of last year. Could you see that sort of resuming that strength over time?

[Stuart Bradie:]

Yes, I think we do see that growing over time. I think the budget we did cover the budget Andy and the fact that the U.K. has got a 16% increase and it's sort of defense budget and Australia announced moving up last year you're probably aware. So I think the budget environment supports our continued momentum there. We announced some good wins, we also talked about the fact the Australia business continues to outperform quarter. So I think there is very healthy momentum. There is good, there is good budget environment and we are very well positioned to take advantage of what's in front of us. So I think that's why we're very upbeat about what we're doing internationally.

[Andy Kaplowitz:]

Thanks for that Stuart. And I wanted to ask you about cyclical recovery in Sustainable Tech in the sense that you've got sizable Petrochem some refinery exposure. Have you seen sort of a balance in those end markets in places like China and such where KBR is historically strong and how do you think about the cyclical recovery in that business over the next 12 months.

[Stuart Bradie:]

Yes, well I don’t know that’s cyclical recovery. I think - there certainly an up-tempo across the technology portfolio and finding under petrochem, but I think there is a change that's happened which really is proven to be advantageous for KBR and you've got the refining community knowing that they have to change and we're seeing a lot of activity as we said around green technology application in the refining segment. And in the Petrochem segment we're seeing this significant demand for propylene that’s driving a lot of our activity around what we're doing in PDH and K-COT as we apply these sort of technologies particularly K-COT unique to KBR. So, I don't really think it's so much a cyclical recovery. I think it's - really sort of redefining the product offtakes to meet the, that gets the sustainable demands of the future and on the market demands for things like propylene. So I do, I think that's what we're seeing and we don't see that in any way slowing down. It's a very hot market and we’ll continue to be so because of the sustainability agenda that's driving. I guess the world at the moment. So I'd be up well for our long-term run and then when you layer in the syngas and hydrogen ammonia opportunities on top of that - each quarter. I'm sure that the ups and downs in various elements, but all over it. It's all over - that the hosts are offering I think you have to see continued growth.

[Operator:]

We will now take our next question from Sean at KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi guys, this is Alex on for Sean this morning. Thanks for taking our questions. So to start off, I just wanted to ask on the cadence of awards because a few federal contractors have highlighted some slowing in awards in the near term, which makes sense considering the change in administration, but is there a point at which we can see a catch-up dynamic there?

[Stuart Bradie:]

I know we've got a sort of an interesting quarter of awards. I think all up by $1.6 billion with options. We've had a very strong award quarter with options, particularly in the NASA space. So we know the number of on program growth awards in terms of additional money is being applied and the certain option years associated with just the way NASA does it. So the overall number was terrific for KBR in the quarter and really a good new story. But typically Q1 is a slow bookings quarter and particularly after an election in the government realm and I'm sure that's coming through with a number of our peers and I think we would probably other than what I just mentioned, we would probably say that's the same across other bits of our of our government business. But I don't really think there is a huge slowdown. I think it's seasonal. I mean it typically you get more awards in Q1, it ramps up in Q2, it goes even higher in Q3 and then drops back down in Q4. That's the typical cadence for government for Sustainable Tech. Again usually Q1 is a slower bookings quarters as people come out of year-end and tell us they when they do sort of year-on-year budgets and they look to sort of pick up pace as you like. As you move closer into Q2. So I really think that our bookings this quarter are highly favourable. I think it is a good news story for KBR given the typical seasonality.

[Unidentified Analyst:]

Yes, that makes sense. And then on Centauri, can you provide us an update on the integration, whether there is a change in confidence behind the revenue synergy targets?

[Stuart Bradie:]

I think the integration is going really well. As we talked about our initial focus with Centauri was to ensure that we deliver those synergies and we talked a 10 cap previously and anti-Centauri book-to-bill was 1.1 in the quarter, again sort of really sort of given the typical seasonal low bookings for government again a terrific performance and they're performing the margin expectation. So I think all up the integration is going well in the business is performing other above-expectation so hats off to the team, they’re doing a terrific job and I think the cultural alignment is proving to be very, very strong, which is for me really important.

[Operator:]

Thank you. So that was all the questions we have in the queue for now. I would like to turn the conference over to Stuart Bradie for any additional or closing remarks.

[Stuart Bradie:]

Thanks Sean. Thank you again for taking the time and for your interest in KBR. As I said at the beginning of the presentation, we’re bang on, it's a very clean quarter in terms of where we're hitting our all our numbers and being a little bit ahead in Q1 in some metrics in terms of expectation and that was the sustainable tech . So really, really strong. So feeling good about the future, feeling good about where we sit, and as I said, the saying that we're on track sounds a little bit understated interest given the on-track means a 20% growth in EPS. So all good for 2021 as we sit here today and obviously strong Q1 performance really helping with that. So thank you for your interest again, and no doubt, we'll talk to most people on this call probably this one - yes, stay safe and we'll talk soon. Thank you.

[Operator:]

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