KBR, Inc. (KBR) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Jamie Cook from Credit Suisse. And as you know, I cover the machinery names as well as engineering and professional services companies. And today, I'm extremely happy to have with us KBR. We have Mark Sopp, who's the Executive Vice President and Chief Financial Officer; Jay Ibrahim, who's the President of Sustainable Technology Solutions, which is a growing and important part of KBR's portfolio; as well as Alison Vasquez, who's the Vice President of Investor Relations. And so thank you, guys, for being here today. In terms of the format, for anyone who's listening, this is a fireside chat that I will moderate. If someone does have a question, you have to e-mail it to me at [email protected], and I will make sure I get that question asked for you. So with that, team, thank you so much for being here.

And Jay, because we have you here, I'm going to kick it off with some questions on sustainable technology solutions because it is an important part of your business. And historically, when I thought of this business, I always thought about it as a GDP-type growth business, but it sounds like that profile of the business is changing. Before we get there though, can you sort of speak to the competitive landscape in ammonia? And sort of are there any other key technologies where KBR leads in market share or where they don't lead and would like to broaden their scope?

Yes. Thanks, Jamie, and we all appreciate basically hosting us and good to see you again. In terms of the ammonia specifically, KBR really has over 50% of the market share. And we see some competition, but definitely, the distant competition [indiscernible] being about 30% of the market share. And some of the other players include Linde and [ Lerge and ODM ] and others. In terms of the ammonia itself, really, I mean, there is quite a bit of demand in ammonia going forward. Today's total production is roughly about 230 million, 250 million tons of ammonia per annum. And the forecast that we see over the next few years, by year 2030, 2035, is going to be more than 300 million tons of ammonia per annum. So you could see, there is a huge demand, and that's about 80 million to 100 million in additional capacity, plus, of course, some of the existing plants need to be revamped and need to be [ moldboard ] and replaced as well. So really, you are circa looking at about 100 million, 120 million tons per annum in LNG. And then if you take a look at that in terms of plans that need to be installed and you use an average of 2,000 to 3,000 metric tons per day per plant, you're looking circa about 100, 120 plants to be installed between now and 2030, 2035. So I mean, we believe that we're going to continue to have that larger share of the market because really our technology is quite differentiated. It delivers definitely a higher and superior process energy when it comes to efficiency. It has a lower process carbon footprint and definitely can operate at higher capacity, which make the carbon capture more affordable. As you take a look at KBR's dollar per ton, whether it's CapEx or OpEx, it's definitely the best in the market today. In terms of other technology really that we believe we're differentiated, we focus really how to produce clean, sustainable end product. And with that, we believe we improve the environmental footprints for our client. We reduce carbon emission. We improve energy efficiency. And definitely, we improve safety when it comes to operation and hazards. Some of these technology include the solid alkylation technology, K-SAAT. We believe that we have the only commercial -- we have the commercial solid asset catalyst of proven technologies, while the others have the corrosive dangerous hydrofluoric or hydrosulfuric acid technologies. Another technology that really is playing quite a bit into sustainability and energy transition is our ROSE, which is really the bottom of the barrel. So this has already taken a waste stream and putting back into the process to monetize it by reducing NOx and SOx and put it to good use to drive client profitability. Also another technology that we launched earlier this year is K-PRO. It's our propylene technology, and we've sold license and we're about to close another one. And again, this is using our proven catalytic crack and K-COT with unique nonchromium-based catalysts. And by doing so, we reduced the operating cost, definitely better for the environmental as it is nonchromium-based and also it gives better energy efficiency by about 25%. So all in all, really, we believe that these technologies does us quite well. And in addition also, we have some strategic partners when it comes to offering ammonia and methanol with Johnson Matthey. And also, we have some association with some of the EPCs in order really to sell the KBR technology and KBR proprietary equipment as well.

Great. And I actually did just get a question online that someone wanted you to dig a little deeper into ammonia and how that can help play a role in hydrogen and sort of what is your view on the economics of hydrogen. And are there any alliances or JVs that could accelerate your positioning in this market?

Yes. I mean we're seeing ammonia being really a huge transition fuel going into the future, and it maybe also -- and then the fuel as well. And if you take a look at ammonia in general, historically, it has been gray ammonia that was produced basically using gas as a feedstock to produce the NH3. Going forward, you're going to see ammonia already play more and more into quality of life. This is in terms of the middle class. We're going to see it more and more into power plants as well in conjunction with coal or potentially replacing coal. And also, we're going to see ammonia more and more in terms of the maritime as well. Now ammonia has really certain advantage over hydrogen, just take a look at ammonia versus hydrogen because it has better energy intensity. So really, you don't need the same volume of ammonia as you would do in hydrogen. And this is really the attractiveness for the maritime. And I could go more into maritime if you'd like me to, but I want to stop here to see if I answer your question.

No, no. I mean we could go more into maritime, that's fine. And then I'll transition -- I got to get some questions in for Mark here, too, but let's dig a little deeper on that, and then we'll transition.

Yes. I mean if you take a look at the world today, these are huge numbers, right? So today, the world use 300 million tons of marine fuel every year. So I mean that's a huge, huge number. And that really put out into the atmosphere about 3% of terms of the low-vol CO2 that is being emitted. Today, about 95% of the 300 million tons really is pretty much fuel oil, and the remaining 5% is a bit of LNG, a bit of LPG and a bit of methanol. Now with ammonia coming in, we're going to see ammonia start replacing the fuel oil. By 2030, we expect the ammonia growth to be about 3% to 5% from 0 today. By 2040, we're going to see the oil dropping down from 95% down to 65%. And a large part of that is going to be ammonia with a bit of methanol and a bit of biofuel. And then by year 2050, and this is really the agreement that was done between IMO and the United Nations, to kind of reduce emission by 50% from 2008 by 2050. We're going to see the oil 40% from 95% down, and ammonia is going to be circa 35% to 40%. So you could see how big the ammonia has taken place. But I mean that's not going to be without challenges, right? Because today, really, the vessels are not equipped to kind of take in ammonia as a fuel, whether it's [ cells ] or whether it's internal combustion. So we're seeing some innovation coming along with that. We're seeing Samsung is looking ready to introduce the first vessel that is ammonia-powered by year 2024, 2025. We're seeing Equinor also converting 1 of their vessels to do the same as well. And also, we need the infrastructure to be developed also to kind of accommodate for that, right? Because when you want to go and bunker, you got to make sure that you have ammonia available at the [ bunkering ]. And the biggest challenge, I would say, really for it to achieve what we want to achieve is going to be the green ammonia, right? So today, we don't have really the commercial large-scale electrolyzers and the solar or wind to kind of get us where we need to get to, but there's definitely plenty of innovation, plenty of initiatives to kind of get us where we need to get to. So all in all, I would say ammonia is looking like it's going to be really a huge part of our future. It's going to start slow between now and 2030, but we're going to see it pick up quite a bit in 2030 to 2050 and beyond.

Okay. And then just last question, and I want to pivot a couple of questions for Mark, too. Can you just talk about your comfort level with the longer-term margin targets in sustainable technology solutions and sort of the path to get to the target? Is it more volume? Is it more mix? Just how we get there in your comfort level?

Well, I mean, we're happy where we're at today. We definitely see a very strong growth outlook. I mean, if anything, it's more bullish outlook. Definitely, our 2021 report cards speak for itself, so pretty much met or exceeded our revenue and margin guidance for STS. And we've increased our EBITDA by over 50% over year 2020. And this is basically the strategy that we've set ourselves last year, circa April, May time frame. And basically, we're sticking to that strategy because really, it gives us differentiation in all the businesses that we do. Our technology is a great business. And we've kind of already taken that business where we were 5 years ago being Tech and our Energy Solutions business at the time to...

I remember that.

Yes. And then as you recall, we were playing basically selling a few licenses and selling basic engineering design. Well, today, we're a leader in that. We've got our own catalyst. We've got our own proprietary equipment. So -- and that business grew over 10%, 12% for the last 10 year, year-on-year CAGR. So -- and also our other business, as you know, whether it is our Advisory business, which is really we've gone from just being a domain expert -- domain expertise to being an advisory. So we're playing more and more into the government to government and government to business, where really we shape the future of the country. And we have done that in Singapore, basically, with the second Singaporean government to kind of shift really from being the fossil fuel hub to being a hydrogen ammonia hub by year 2030, 2040. We're doing the same in Australia. We're doing the same with the MoD in the U.K. as well, kind of changing their fleet from using fuel oil into using ammonia as well. Our integrated solutions business is a great business. Really it's doing -- it's playing the growth scheme in terms of the carbon capture in terms of the decarbonization, in terms of managing the large complex job. And last but not least is really our TLIS business, which is a combination of really our digital plus our maintenance and operation experience. And really, the difference between what we're doing today versus what historically we've done has really taken the data and putting it to good use. So already, it's about improving reliability, availability, the uptime of machinery, and then we're putting the artificial intelligence to predict the future. So we eliminate by doing so the unplanned shutdown. And hence, by doing so, we reduce OpEx. But more importantly, also we reduce carbon footprint because you don't have to depressure your compressors and vessels and burn your gas or your liquid into the flaring system. So I would say, all in all, we're good. We are very structured. We decide really who we want to dance with versus just dancing with everyone. And we focus basically on the bottom line, and this is really what put us into this position where everyone is going to ask us to dance.

Well, that's a good position to be in, Jay. Mark, I'm not going to let you get away with not speaking at all. So it looks like you've been quite busy. And I just wanted to -- if you could walk through sort of the recent refinancing you did, what you think that adds, helps KBR in terms of creating greater financial flexibility. Does it change how you're viewing your leverage targets? And then is there any potential tailwind from an interest expense perspective?

Well, yes, I'm here. Can you hear me?

How are you? I can hear you.

Thank you, and thank you for having us, Jamie. It's always a great pleasure. We appreciate the great work and thank those who are tuning in hearing about KBR today, and I think a very interesting story. So great things are happening at KBR, one of which is the refinancing. That just gives us more tools in the toolshed to do what we thought we would do, which is to march toward our long-term targets of $4 to $6 per share by 2025, and we're off to a really great start toward that, in fact, if anything, ahead of pace for several reasons, which I can cover. But the refinancing itself just pivots on people like Jay and Byron and Ella and everybody else doing a great job building a core business that is low-capital intensity, predictable, producer of profits and great end markets. And with that, we've always kept our leverage in check. We have made smart acquisitions. We've had balanced capital deployment. We've been able to get credit rating upgrades consistently. I think we've got 2 full notches in 3 years, which is pretty hard to do. And with that, we also have a great treasure as well, and she accessed the capital markets at a good time and got a better credit deals. So we've got 5 fresh years. We've got a lot of capacity, and we're lowering our interest rates by a good chunk as well. And we have a lot of flexibility relative to how we deploy capital. So again, just another tool in the toolshed.

Okay. And then, I mean, you did sort of allude your feeling about sort of the $4 to $6 in earnings power, and what's driving that? And at what point do we decide to -- what's driving that? Is the path to get there steady? Or is it a step-function change? And then yes, so I guess -- and then at some point to be now in that range, the $4 to $6, maybe $5 to $6? Or how are you thinking about that?

Yes. I imagine we will narrow it over time, but I just wanted to convey, we're really off to a great start. So we set these targets not long ago. But since then, we've seen a better outcome relative to the budget environment that we're in, pretty much as predicted on the Defense side in the United States. But coming through an election and all of that, we have a well-funded Department of Defense in the United States. We've got 14% growth over 4 years in the United Kingdom, and we have greater than that growth in terms of the Defense budgets in Australia, and we hit all 3 of those markets very heavily, as you know. The NASA piece was a pleasant surprise, getting a 6.5% increase off of an increased number in the preceding years. And so the consensus and the bipartisan support for human space flight and the role that space has in ESG and sustainability in Earth Sciences is there, and we really expect great things from our space business. So the addressable markets are great. We, of course, have hit all of our main milestones, winning recompetes, winning new awards, meeting our targets quarter after quarter after quarter. We've deployed more cash than our model suggests. So if you'll recall, the $6 target is based on a 50% capital deployment assumption, primarily toward -- we assume buybacks with M&A being even more accretive than that. And we've deployed more than that pace primarily for Frazer-Nash, which we're really excited about. And so that's terrific. We said on our last call, 2 more points, that we've now earned 60% in terms of our book to business of all of the revenue that is needed to deliver our targets over the next few years. We've got very good visibility. That's just continue to notch up. And finally but very significantly, should we get through the protest period, the global household goods project is something that by itself can make a big debt toward those long-term targets, it being so big potentially. And so too early to talk about that in great detail, but that in and of itself is a big project. And we want it. That's disruptive technology that we're really excited about to better serve our men and women in uniform and something that's very important to them and personal to them.

Okay. And can you -- I mean, what can you say on that contract? I mean it doesn't sound like you want to say much, but like that was like -- what was it, $20 billion contract over 9 years or something like that? Is that the one that we're talking about?

That -- yes. And it is. It is. And so...

That was -- I want to say it even like came out on like a Friday afternoon or something, it was sort of below the radar or I don't know. But anyway or guess when will you be able to address that when you -- like with the protest, when do we think we get clarity?

Right. So what we can say is that this is something we've worked on for 3 solid years. And we've put an A Team on this project, and it's gone through a pretty protracted procurement cycle and you're never through it until you get through the protest. But right now, the protest period would formally end, barring any surprises, in early March of '22. So we've got ways to go before we get through that. And there are protests. That was as expected when there's something this much on the line. What I can say about the size, it's really not appropriate to talk about earnings and margins and all of that at this point, but the size itself, given the number of military moves that occurs and this taking care of all of those as a single-source prime contract to handle all of the military moves around the world, it could ramp up to $2 billion-plus per year when it's fully ramped up. So that's the size against the backdrop of KBR today, $6 billion to $7 billion. So that gives you some perspectives on the magnitude. Now what I will say is it's a truly disruptive capability that we're going to deliver. So we are delivering a software solution that will modernize that entire platform. It will make the moves have a lesser environmental impact because we'll have more efficiency in the load. We will digitize the customer service component, so the military families can track their moves as they are occurring. We'll have a digitized claims process. We will use AI, ML and video to actually image the items that are being moved, so we can have a record keeping of exactly what's going. And then we'll really leverage the existing supply chain in trucking and so forth, small business to make sure that we have consistent delivery. And we have proper incentives in place. It's a really great opportunity for the military and us together to do a better job, again, with this very personal act of moving of which there is many every year and make it a successful outcome at a better overall cost to the government.

Okay. Well, congratulations. I'm sorry, go ahead, Alison.

One item, just to clarify. So Mark did lay out, I mean, it does have an opportunity to ramp up to $2 billion-plus per year. But just keep in mind that we are in a joint venture, and we haven't talked about what our ownership of that joint venture is. But we are the lead majority partner in the joint venture, but not all of that run rate would accrue to KBR. So I just wanted to talk about that.

I talked about the program itself. But good point, Alison. Thank you.

Okay. Okay. That's helpful. I guess then, Mark -- time's gone quickly. Given the strength of the balance sheet and the refinancing, I mean, you've been very opportunistic with Centauri and with Frazer-Nash. Obviously, they are nice acquisitions to have. But how are you balancing with this visibility that you have in some of these wins and confidence in getting to the $4 to $6 in earnings power, which the market probably isn't giving you credit for, share repo versus more M&A? And to what degree, as you think about M&A, do we want to better balance the portfolio so that perhaps STS becomes a bigger piece of the pie relative to Government Solutions? Is that something you're contemplating, I guess, or considering?

Yes, very much so. I think that we don't have to conduct more M&A. We've achieved the scale and capabilities that we're very comfortable with, but we are opportunistic. And Frazer-Nash, Centauri were good examples of that. We also like balanced capital deployment and not putting all of our eggs in 1 basket, and we've demonstrated buybacks and dividend increases and M&A and responsible leverage management all at the same time, and we'll continue to do that. But to the extent there are opportunities available, we would absolutely love to add more capability and scale to our STS business. This is a fantastic leadership team. The end markets, as Jay well articulated, are really compelling and exciting. And we leverage technology very well through a worldwide sales force that is top-notch. And so it's a beautiful platform to add capability to. And it being commercial and all fixed price, if you will, if you're a government investor, scale matters and scale drops to the bottom line. And so that's a major driver for the margin improvement we already expect for STS, increasing scale at greater cost efficiency and more capability to that would only amplify it. So we can do things very accretively in this area. But we also see that opportunities are less frequent in the STS side than what we see on the Government side. So we have to just find the right targets or the cultural fit and the financial fit, and of course, a strategic fit. But we -- Jay and team are looking very hard for targets, for sure.

An I guess, to what degree -- the thing that I find frustrating by your valuation, and maybe you feel frustrated about your valuation, as I do think you guys have shown the ability to grow sustainably on an organic basis. Like the top line and the margins are obviously -- have come through and are improving, yet I still think you sort of get pegged to sort of traditional government IT service companies. And that could be good or bad, depending on what -- if we're worried about the budget or not. But I mean to what degree does that keep -- frustrate you? And what do you think, I guess -- because we only have a couple of minutes off, like what do you think the market underappreciates about your portfolio relative to pegging to a government IT services company?

Yes, I'll just cut to the chase. I think that our Government business demonstrates over and over again that it is a top-performing government business in terms of growth, in terms of margins, in terms of cash flow, in terms of ability to win new work. So I don't see any reason why our Government business by itself is not in a top quartile valuation amidst government peers. But the STS business, when you look at it, the addressable market dynamics are just outstanding. Our positioning relative to market share in ammonia and other areas is also outstanding. The ESG proposition is really compelling. Every single thing we do, other than the legacy contracts we're working off, every single thing we do in STS has an ESG value proposition to the customer and to society, every single thing. And so it has higher growth rates embodied in our long-term targets, and it has higher margins. And it is just as good or better cash flow properties. So because of those things, I think STS would have a significantly higher multiple than the Government business. And when you blend the 2, it should take us to a place significantly north of where we are today, as I think you're suggesting.

Yes. And I mean I think the other thing that people underappreciate, I think you've said before, probably 30% or 32% of your revenues, I think, are derived from sort of ESG.

Yes.

Is there a view that, that can become a bigger part of the business if we're looking out over 4 or 5 years, is it 30, north of 40? Or is that something that we're focused on?

By virtue of the fact that STS is...

Will grow at a faster pace?

Could grow at a faster pace and it has higher margins and we're expecting margin improvement there, the economic proportional contribution toward ES will increase at a faster pace by that alone. The Government piece also has -- a part of that equation as well, particularly the Earth Sciences. And we see ongoing demand in NASA budgets and even space for us relative to those sorts of things. So I think, yes, that number should go up for those reasons. And we're very proud of that because it demonstrates that not only are we within our walls very focused on sustainability on all 10 of the pillars we have, but we are propelling that into the marketplace and making others more successful and able to meet their ESG objectives, which a lot of companies can't do. And we can say that at a significant scale.

Okay. All right. Well, with that, I think we are out of time. I want to thank you all for coming and supporting the conference. Jay -- I see Mark quite often on Zoom. Jay, I haven't seen you in a couple of years. So it was good to interact with you as well as Alison. And I'm hoping next year, we're in sunny Palm Beach, we're going to do the fireside chat versus on Zoom. So thank you for your support. Have a great holiday, and we'll continue to mark your story. Thanks.

Thank you, Jamie.

Thank you. Good to see you, Jamie.

Thank you.

Thanks you.

Thanks to Alison, too. Thanks.