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

Well, thank you, Byron and Alison, for joining us. I need to do the disclosure statements. So for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And of course, if you have any questions, please reach out to your Morgan Stanley representative. With that, we're very pleased to have Byron Bright, who's the President of Government Services of KBR; and then Alison Vasquez, who is the Vice President of IR for KBR. So one thing that maybe would be helpful -- Byron, maybe if you can give a quick overview of KBR, obviously, the 2 big businesses. Give us a view of the vision. You made it too interesting an investment and an acquisition. Maybe give us a quick overview, and then we'll get into Q&A.

Sure. Great. Thanks. And thanks to Morgan Stanley for inviting us. Yes, we love to tell the KBR story. And just for those that don't know us that well, we're a large science, technology and engineering company that really work for governments and commercial companies around the world and really focused on helping our customers solve really complex problems. And we really go to market around a couple of different factors in the business that I run, the Government Solutions business. And then we have a really exciting sustainable technology business that I would love to talk about as we get into Q&A. In the government business, we do a lot of work for a variety of clients, both in the U.S. as well as the U.K. and Australia in particular. And we go to market around 4 different domains in government. First is the Science & Space. So we do a lot of support work for NASA. So we really are the operational backbone of NASA. We run Mission Control down at Johnson Space Center. We fly the satellites, then look at the Earth observation and do climate research for Goddard and Earth Sciences for NASA. So really large NASA portfolio, a lot of high-end scientists and researchers and just a really exciting mission that, really, all of our people in KBR love. The other part of our portfolio is focused around the defense and intel community. And there, we're embedded in many different platforms supporting, really, all of the systems the military uses and really with a focus on kind of emerging technology. So how the defense and intelligence customers apply AI or ML or cyber on various platforms, how they're looking at technologies for defensive capabilities such as counter UAV and really how they move data around the world. And some of the acquisitions we've done in the past have really helped move us into some really high-end areas, classified areas with the intelligence community, particularly around space. We do work with the NRO and other customers, really helping them understand what's happening in space from a sensor standpoint and a space domain awareness standpoint. So a lot of -- really about helping our customers operationalize that data and make good decisions. Another piece of our business is our Readiness & Sustainment business, where we really focus on supporting our customers' facilities and assets around the world, so really in a sustainment kind of focus. We support large maintenance of ground vehicles here in the U.S. We support training exercises out here in California at Fort Irwin. So a lot of big support work so they can stay readiness and prepared as well as support them as they deploy overseas. And then the other piece of our government business is that international portfolio, where we do all of those exact same things for the U.K. and Australian government. And all these are characterized by really kind of high-end science and engineers and researchers. So that portfolio ranges a little above $4 billion a year. And as a company, we're a little over $6 billion a year. So the other piece of that portfolio is our sustainable technology portfolio, where we really look at helping industrial customers, in particular, make things more productive, safer, greener. We actually own IP in that business, about 70 different technologies that we license to help companies think about the energy transition in that future. And so it's another big piece, exciting piece of our work. But at the end of the day, what really excites us is doing things that matter, and we have over 28,000 employees around the world, and that real global and international footprint is really one of the reasons that I've been with KBR for 12 years. It really helps you get excited every day when you can wake up and see that you're making a difference.

Great. Thanks for that overview, Byron.

As you look at GS and STS, STS obviously has had a great run in terms of margin profile and growth. How do you see that business evolving relative to the rest of the portfolio?

Yes. It's really in a good space right now, particularly with what we're seeing from the demand signals. Obviously, what's happened in Russia and Ukraine has really increased the need for energy security. So you have that kind of macro issue going on, energy security. Obviously, sustainability in how we transition to the fuels of the future is another big market factor. And then obviously, with rising interest rates in things, energy affordability, so you kind of have these 3 different major impacts in that business really driving demand. And we're right in the heart of helping customers think through that. So we do a lot of strategic advisory work either with governments around the world or also with commercial companies about what are the right transition fuels and how do you go from maybe from ammonia today to blue ammonia to green ammonia, and is that the fuel of the future? We own a lot of those types of IP. So we really understand the fundamental science behind this, and we have technologies and processes to make that better. So we see that -- all those demand signals really driving kind of outpaced growth, and we've guided to that. And then -- and really, that business is also a much higher margin business. So we -- so as a part of the overall KBR, we definitely see it continue to contribute more and more to our bottom line.

And that business is virtually all international. Is that -- or...

No. I mean, it's really -- it is really a global business, and we really have a broad global sales team where we were out selling those licenses. And it's really interesting to watch that because from time to time, different regions of the world are hotter or not. But we definitely do sell in the U.S., and we do a lot of work in the U.S. In addition to selling license, we have also a lot of engineering and pre-FEED type work as well in the U.S.

Do you see a more balanced portfolio as you go forward since it's growing faster? You've done obviously the investment in [ MRO ]. Do you see a situation where down the road, the portfolio is more like 50-50 or...

I don't think we look at it in terms of that. I mean, I definitely think you'll see it continue to outpace on an EBITDA growth standpoint. We've laid out projections for that margin growth profile to get up into the high teens and above that. Today, it's already kind of getting up to those levels. That's a really big piece. And with its growth at 10% to 12% over a multiple-year kind of CAGR, that's definitely going to contribute more to the bottom line. So we definitely continue to see that. From a revenue standpoint, it's just starting from a smaller point. We have quite a large revenue base in the government business, but it's really a critical part of our business and continues to just really add.

Back to your business a little bit on GS. You've had a series of successes internationally. Maybe you can expand on that because that's, frankly, one of the attractiveness of KBR, how internationally -- your presence internationally. So maybe you can give us an overview of the wins you've had internationally and how do you see the market evolving there for your...

Yes. I really think that international business is another one of those key elements that differentiates KBR from maybe other kind of aerospace and defense contractors. A lot of work around the world, but we're truly an international company. I mean, in the U.K., we are a U.K. company. And in Australia, they see us as really an Australian company. And much like we did in the U.S., if you go back several years, we really focused on transforming our U.S. portfolio to those upmarket technologies, buying companies like Centauri that really took us into the classified world or SGT that really helped build our NASA portfolio. And we're following that same thesis in the U.K. in particular, and we purchased a company called Frazer-Nash last year, which is really high-end strategic consulting, system engineering company across a really wide range of areas. Energy transition is one of those areas as well. Sustainability, but also in the systems engineering and platform business. And then most recently, we announced a purchase of a company called VIMA in the U.K., a smaller company, but it really moves us into the digital transformation and all governments around the world, just like the U.S., are having to face these kinds of modernization challenges. And so we just want to continue to shape these portfolios to stay in these really well-funded end markets. and we see that going on in the U.K. And then Australia, we've done really well there organically. It's one of the fastest parts of our -- growing parts of our business. And we do much of the same things that we do that I described in the U.S. or the U.K., we do down there in Australia, and they have the same kind of external threats and things that they're trying to combat as well. So yes, I think it's a really exciting part of our portfolio, and we want to continue to see it shape into those well-funded end markets.

I assume the AUKUS initiative is going to help you in a big way.

AUKUS is a great example of where I feel KBR has a special role, because we have such deep relationships in those 3 countries that we can help our customers bridge that gap across the ocean. So we definitely -- we've already won some study work. Frazer-Nash had a group in Australia, and they've already won some study work in Australia, looking at various infrastructure requirements that would happen -- that would need to happen for AUKUS, so a lot of really good synergies between the 3 countries.

Got it. You mentioned, obviously, the VIMA acquisition. When you think of capital allocation, how do you see that M&A versus organic versus other initiatives like buybacks or debt reduction?

We really try to take a balanced approach and just be very strategic about how we deploy capital. We're always looking at M&A, and it's been a big positive part of our transformation story. But obviously, when times get rising interest rates and others, we made sure that we're just being smart about how we deploy that capital. So buybacks have been -- we've done a good amount of buybacks recently, and we've done the smaller M&As like we mentioned with VIMA. So we really -- if you look at the second quarter as an example, really across all the different deployment options, we've been really kind of measured and balanced. But we've got a very healthy balance sheet right now. And our leverage ratio is we've kind of got some good optionality as we go forward, and maybe there'll be some other attractive targets. But M&A is something that we're always interested in. It's been a big part of our story.

Yes. How -- maybe just switching to one of the themes we've been hearing here from some of your peers is talent -- hiring and retention and the difficulty of attracting the right people and obviously, for the important type of work that you do for the government. Maybe, Byron, you can elaborate on that. What's unique about KBR, number one, from that perspective in terms of attracting people? And then what kind of challenges are you facing, like most of your peers, in attracting the right talent?

Yes. Interestingly enough, I actually think our STS portfolio actually helps us attract government people. I mean, today's world, they really do care. It's not just lip service. They really do care about the environment and climate change. And they want to be part of a company that's responsible and thoughtful. And I think we really are making a difference with our sustainable technologies. But yes, we're in the same competitive field as all the other players, particularly in those really high-end cyber software developers, classified skill sets. And there's just a huge demand for that. So we're definitely in competition with our peers for that kind of talent. And I will say that it's -- we've seen the attrition rates kind of tick up through -- as we came out of COVID. I think they've come back down more recently. So I think they're getting a little bit more into the normal levels. But it's a constant focus of ours, making sure that we're a responsible company, that we really invest in our employees and having a real good employee value proposition is critical to our success.

Are you competing against some of the tech companies as well in...

Yes, the nontraditionals are coming into our space. And when you're in the classified world, obviously, if they can go work in an unclassified world and not have to be in a [ skiff ] and those kinds of things, there's the competition there. But I think what we try to sell them on is the work that we're doing. I mean, particularly in the classified realm. We're working on technologies that people aren't even aware of yet. We are doing things that have never been done before. I mean we had a major role in the James Webb Space Telescope, a one-of-a-kind. It's really going to fundamentally change how we, as a nation and as a world, think about the universe and the planet. I mean, how cool is that to work on stuff like that, right? I mean, so we recently announced that we won with one of our partners, Axiom, which is the commercial space company, the development of the next space suit. So we're on a contract with various task orders to come through there to help design and develop the next lunar suit. I mean, how cool is that to be part of that? So I think we have a story and a book of business that we can fight against some of the nontraditionals and some of the other players but -- because what we do is really important, and it really makes a difference to our communities.

Right. So actually, speaking of space, obviously, you mentioned an earlier part of the GS portfolio. How do you see that as a vector of growth at this space, which obviously, one which is, I agree, very cool. But just in general, there seems to be a lot of focus from the DoD on space in general. Obviously, they created Space Force on its own, and how do you see that as a vector of growth for the GS part of the business?

Yes. I mean we're already a top-tier player in NASA. We have one of the largest portfolios and today, where in every major kind of NASA center. So we have a great book of business with really long-term under -- kind of contracts that underpin that business.

A win on your renew...

We just won our largest recompete there at Goddard.

No protests?

No protests, because in it -- and we won that in the best value way. So I mean, we're really excited about that contract. We've had it for a number of years. That's the earth sciences contract. But yes, so I think you're seeing a lot of change in civil space related to these commercial companies. And right now, it's pretty low revenue dollars, but we are a key part of that ecosystem. We have some Space Act agreements with NASA. So they own some of the facilities, but we own the experts, the expertise, and we can use those facilities to train the commercial astronauts. So we've trained all the commercial astronauts that have flown so far. So we're finding our niche in between the government and these new space companies to really be that integrator, and we're partnering and doing work for many of them, and we've mentioned some such as Axiom. So I think it's a really important part of our portfolio. I think the bigger growth will come through the Space Force. I mean, they have just much bigger budgets. And if you see what's going on in the world, the need for information superiority and protection of our space assets and the cybersecurity of those space assets. And then there's so much data coming down. The ability to develop algorithms and tools to use that data to make decisions is where I see probably a bigger growth vector. So that's been part of our thesis. We had this great civil space business. With Centauri coming in, it gave us more access to some of the classified and military space work, and we definitely want to continue to see that kind of build-out as the Space Force. It's still really early in its days, but a lot of exciting opportunities there.

Got it. You're obviously a big part of LOGCAP. Maybe just some commentary on that. How do you see that business [ kind of bearing ] in.

Sure. And for those that don't know, that's part of our Readiness & Sustainment portfolio. It's a large contract with the Army. We've been on it for decades. And this most recent version, our focus is really inside the United States and North [ com ], where I mentioned we do a lot of training and other sustainment support. A lot of humanitarian work goes through that contract kind of continue to see humanitarian support work. Today, probably the biggest focus is in Eastern Europe. So we also are the strategic provider on that contract for Eastern Europe, and we're providing a lot of training and exercise as U.S. and allies deploy forces into Poland and other countries. We're there to support them with logistics and training support needs. We're doing a lot of material movement as they move up and down around different countries to support our NATO ally. So it's a good part of our business. more complex than people probably realize working in like 13 different countries in Eastern Europe and just maintaining all the regulatory environments you have to do in those countries, but really dedicated group of people that have just been a tremendous part of our portfolio over the last several years.

And do you see, obviously, with all the situation in Ukraine and our allies, new members joining NATO and everything, do you see that business expanding going forward?

I think we have a steady state we've had for multiple years, a steady-state business in Europe related to training and exercises already. But I definitely see -- we've seen an uptick in that, and I think that will continue for some time. And so yes, I'm optimistic we'll see more volume kind of come through that. Obviously, there's some short terms that have come through just with exercises and deployments and things like that, and that can often be lumpy on the top. But it's -- in addition to just that kind of on-the-ground support work, I think what you're seeing is indirectly, back in the U.S., so development of, as I said, sensors or counter UAV or directed energy, those things are becoming more and more important. As we work in program offices, I mean, obviously, they are the ones developing the next-generation systems to support threats like we've seen in Eastern Europe. So we also get some kind of indirect growth in our kind of systems engineering business based on the events that are happening in the world.

Yes -- the budget obviously looks pretty robust, at least what's been proposed, the Senate increased it. The House increased it. Do you see another CR situation developing? It looks like we may have another one. How do you see the budgetary environment with the elections coming up, obviously? And how would that play?

Yes. It's been an odd year. I mean the budgets are really robust. I mean we've seen the President's budget and Congress actually putting money on top of that, which means it doesn't always happen in the last couple of years. We've had a really nice budgetary environment. Obviously, we had a CR this year until March. So it's been a little -- the outlays have been a little bit slower through the summer. And frankly, I would -- I'd bet you a lot that they'll have a CR on 1 October. I think they're negotiating it this week, actually, that will probably last at least until after the midterms into December. So that's frustrating. It's actually probably more frustrating for our customers, right? Our customers have missions and contracts and things they need to get done, and it kind of -- it's very disruptive to the military in particular, in their planning cycle. So from a business standpoint, we've got really good long-term underpinning contracts, so we can manage through that. But it does kind of make the pace of awards sometimes a little lumpy. We've seen -- we had a really good Q2. So we saw -- when the CR got lifted, we saw a lot of awards kind of come through in Q2 and some good movement there. We'll see how the second half of the year plays out.

Yes. I have a couple of more questions. Any questions from the audience for Byron? The other one is actually speaking of the second quarter, you had a great book-to-bill growth. And when you compare that to your peers, frankly, most of them were under 1 in terms of book-to-bill. How do you see that in terms of the next few quarters? Do you continue to see that robustness?

I mean we had good bookings on all parts of KBR. I think sometimes you hit on all cylinders. STS had a really strong booking quarter as well with some large projects coming through. So I mean, that was probably a really nice quarter. We have a good pipeline of work. We have a lot of awards waiting to be decided upon just sitting on the government's desk. So I'm very hopeful we'll continue to see the pace of awards pick up. When you look at the year, a lot of our work's already under contract for this year. So we're -- we feel very confident in where we are and we're right on track for the guidance that we put out. And a lot of the awards that we'll get late this year will actually help. They'll ramp through '23 and into '24. So I will keep an eye on that pace of bookings. But like I said, we've got a nice robust pipeline, a lot of awards submitted that can be adjudicated very quickly in the next 6 to 8 months. So we're optimistic on the outlook.

Byron, there has been obviously a fair amount of M&A in the past in the sector, whether it's private equity or strategics. How do you see the current regulatory regime environment in D.C., in particular, obviously, who's having some issues on the average situation. How -- do you see that changing? Or do you think that it's going to be pretty tough to get anything large done?

I mean, those are some unique things, I think, with OEMs that we probably hadn't seen in the recent past anyway. From my perspective, I think where KBR plays and the types of things that we would go after, it really doesn't worry me. And part of our strategy is really focused on, when we do an M&A, bringing on something with no overlap, either a new customer or a new capability. That's really the synergy play for us. We're looking for well-run companies in markets that are very complementary. So I don't see any particular concern for what we would do in the M&A. I mean those are unique things, but I think there's probably some unique situations, particularly in some of those where they're kind of singularly focused on an intel customer or something like that. So I don't know that I can comment much more on the regulatory environment, but I feel like it's not something that concerns me. There's still a good number of targets out there that we see come through and we obviously participate in looking at those. But we really like to be more proactive and build a relationship with maybe someone we've worked with in the past that we have already had a strategic partner with and try to do our acquisitions that way and not kind of get caught up in some kind of auction process, so -- and we've been successful on that with several of our acquisitions in the past.

Makes sense. Just on valuation for a second. So, great second quarter, high book-to-bill, high growth, great margins. Yes, I think you're trading in line with some of your peers. What are the things -- the ingredients, you think, that are going to have to come to play to have KBR trade at a premium, frankly, to some of your peers?

Well, we definitely think we deserve more. And so we're definitely looking to see those valuations continue to rise. I mean if you look at what we've done over the last several years, we really have caught up to where we thought we should be in a lot of ways, but we think there's a lot more headroom there. I think we're really differentiated. And I think that's the messaging we're trying to get out is our international portfolio is very different than other aerospace -- there's other aerospace-and-defense that work internationally, but we truly are a global company and we get a lot of value out of our STS business in working in these foreign countries and understanding how to be commercial overseas. And so I think that international differentiator should drive a higher valuation. I think our ownership of IP and sustainable technology is a differentiator. So I really do think that with our kind of consistent meeting what we say, and that's really important to us, doing what we say and meeting those commitments. We've done that quarter, over quarter, over quarter trying to build that credibility, really diversified portfolio with no real risk, some differentiated technologies, some -- owning some IP. So we think that's the messaging that we really want to get out to people to see that we really do think that we can have some more room to grow in valuation. That's one of the reasons I'm here.

Yes. You had a great second quarter, so hopefully, that will continue to be the case. It sounds like everything you're describing between the portfolio and international and STS, which is very unique relative to other government services companies, frankly, that should be able to achieve that, so.

Yes. And we're working right now, I think, in some really well-funded end markets, right? If you just think of national security issues and energy and sustainability issues. I mean, what 2 better places to be right now. And I think we have really, really well-funded end markets, blue-chip customers that we're working with around the world, well-paying customers, creating a lot of -- generating a lot of cash, good balance sheet. And I think -- so we really feel poised that we can manage through some of these uncertain times, and we've done quite well through that. And we've got some good positive momentum as we move forward.

Great. Well, thank you very much for joining us today. And I think you exhausted my questions. And again, good luck with the rest of the year.

Thank you very much. We appreciate you being here.

All right. Thank you, everyone. Cheers.