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

Good afternoon, everyone. Thanks for joining us. Again, as Greg mentioned, my name is Peter Arment. I'm the senior aerospace defense analyst here at Baird, and we're delighted to have KBR in this -- for this session. And from KBR, we have Mark Sopp, who's the Executive Vice President and Chief Financial Officer; and Byron Bright, who's President of Government Solutions. So gentlemen, thank you for joining us.

Thank you.

Thanks for having us.

We very, very much appreciate it. And let's just start, I guess, big picture because there's been a lot of a long history of kind of reshaping the business. And you've kind of announced a big review going back about 8 years ago, in 2014. And the market has responded very well to those changes. Your stock price has really increased from what we call low teens up to almost a 200% increase. So maybe just start, Mark, with just kind of the strategic evolution of KBR you've over -- gone over the last 8 years and how you're positioned right now.

Great. Actually, do you want to go ahead and get us started?

You go ahead, yes.

Thanks, Peter. Appreciate it. I think, KBR, there may still be some misperceptions in the industry about who we are today and kind of where we come from, but really believe that we've built something unique and special in the government services industry. And our real focus is on science, engineering and technology solutions that help make a safe, secure and sustainable world. And I really appreciate your comments this morning on ESG because we feel like we were doing sustainability before it was cool, and that's a really big part of who we are. But more so, we've also stayed really true to our history of being that really tip-of-the-spear, operationally focused contractor, where we're embedded deep in our customers' missions. And there's a lot of companies out there building all these new solutions. And I kind of say that there are solutions looking for a problem, where, with our customers, and understand their problems at a fundamental operational level and are applying the right kind of solutions. Today, we're about $7 billion -- approaching $7 billion, and go-to-market really around 2 sectors, our Government Solutions sectors and our Sustainability Technology Solutions sector, which maybe we get into in a minute. But our business that we've built, a lot of it through acquisition. We've had major acquisitions over the last 8 years. It was very purposely built around big themes that you're talking about at this conference: defense modernization, space superiority, human performance, really -- and then really taking care of the environment through those sustainable solutions that we have. In my part of the business, Government Solutions, we feel like we've built this diverse business that's equally as good as -- or equally as diverse and resilient as some of the household names in the industry but with really important differentiators. And we delivered organic growth and kind of proven out our thesis over the last 4 years of the CAGR approaching 10% growth over 4 years. So really strong performance.

Yes, that's -- I mean, it's a tremendous change from going back 8 years ago. But maybe what would you highlight as maybe the differentiators that you would or the elevator pitch that would summarize KBR?

Elevator pitch has several elements, Peter. But before I do that, thanks, everyone, for your interest in KBR and coming here today. We're really excited to be in front of you. As Byron said, government is mostly focused on security in various forms. And we take that with passion, of course, as does everybody here in the conference today. Where we are different is the operational focus that Byron said earlier and augmenting that with digital capability, which obviously is increasingly important. So you see a lot of other players that are more digitally focused that then try to operationalize. We take it the other way around. We are global in our Government business, which is quite distinct. About 25% of our economics in our government sector comes from the Ministry of Defense in the U.K. and the Department of Defense in Australia in pretty equal amounts, so they're both quite sizable. And so that's the government business, very space-oriented as well with the acquisitions we've made and the organic growth we've seen also. Now on the commercial side, Sustainable Technology is really about something you talked about this morning. So many years ago, we really started focusing on helping the industrial sector and, hopefully, the government sector operationalize in a more environmentally responsible way. And the intellectual property we have in Sustainable Tech helps some of the biggest companies in the world and, at least, preliminarily, the biggest governments in the world embark on an energy transition plan to operate more responsibly. So we have intellectual property that helps produce oils and gases, primarily into end products in a cleaner way, in a safer way, and to use less energy in the process. And that intellectual property garners license revenue, very attractive margins and really benefiting from the megatrend and the social mandate that we have to be better with our environment. So you have Government really about national security and the Sustainable Tech is really about energy security and energy transition. And we have been thought leaders there for some time. And through a combination of skill and luck, we find ourselves in really good market conditions right now.

Yes. So you kind of just touched upon where I wanted to go between talking about those 2, Government Solutions and the Sustainable Technology Solutions. Maybe just -- you mentioned some of the nuances, but maybe you could just help us understand maybe how they complement or how you can leverage on both of those.

Yes, some people scratch their heads as to why these things belong together. But there are some common elements there that really excite us and, more importantly, excite our employees and our customers. So if you think about it, we do really cool things and things that matter in Government, but we also do really cool things and things that matter in our Sustainable Tech business. So when we hire government professionals, they like the fact that we're so environmentally focused in our Sustainable Tech business, and we're really changing the world in the industrial sector. And we see opportunities to bring that thinking and those capabilities into the Department of Defense and the Department of Energy and our customers in the U.K. and Australia as well that are, of course, on the same route. And so that bond of what's socially good relative to national security and environmentally good relative to that mandate is something that really allows us to attract great people and keep them, number one. Number two, we are truly a global business. And employees these days and customers like to have a global footprint and global access to diverse talent, to diverse capabilities. And it's a diversification play for us, to some degree, but it actually helps us bond as a company. And so our international footprint has enabled us to bring Government Solutions to new customers there and vice versa. And we think that's really important. Another element, I would say, is that while we have many different offerings, at the end of the day, we're a projects-based company. Everything we do is a project. And it might be with Saudi Aramco or it might be with the Department of Defense, but it's a project that involves a number of capabilities, program management, a lot of digital insertion and great people and great leaders along the way. And we share talents across our 2 businesses in running very sophisticated, complex and very impactful projects. And so there's a common bond there. And then as I was suggesting earlier, the industrial sector and the commercial sector are very committed to operating in a more energy-efficient and energy-responsible and environmentally responsible way. We're very sure that, at some point, the governments that we serve will have equal priority in that transition. And who better than KBR, with our footprint in both camps, to consult them on this journey and to actually enact some of the technology to make it become a reality.

I'm sure you're educating them quite a bit on your ESG efforts. I won't get on my soapbox. But maybe in -- yes, sort of in recent news you had in HomeSafe Alliance, it's a KBR-led JV. That was a [ reformed ] award. Maybe just give us a little bit about that, and then we'll go from there.

Yes. This is a great project that we're doing, but it's quite large and really transformational. And we are now a true partner with TRANSCOM, and it's right in line with our values of really being out there with the soldiers and understanding what impacts their lives. And so this is taking care of all soldiers and DoD civilians and their families' household moves. Now that sounds pretty basic, right? But what is our role? We are really modernizing and driving a digital transformation story inside of TRANSCOM. The way it's done today, it's a very disconnected network, very commercial, very fragmented, not -- the DoD itself, TRANSCOM does not have a common operating picture, that single pane of glass, to understand the quality of moves and the cost of moves. And through KBR implementing with our partners and through this joint venture, we'll be able to provide that digital transformation story and change the experience of the soldier on the ground. Very app-based, very modern, tracking their goods, photos for claims, and all those kind of things that you would expect of a modern digital experience, they don't have that today. They're still around with pencil and paper and stickers all over your furniture, if many of you has moved, and we'd look to transform that. It's huge for KBR from a financial perspective. It's a $20 billion contract over about 9 to 10 years. And when it fully ramps -- it will take a while to ramp up, but when it fully ramps, it will be $1.5 billion to $2 billion a year in revenue. And just really excited. It truly is an alliance. We are partnered with the entire industry. We have a huge amount of small businesses that are part of our alliance. And the things that we can implement by owning the full supply chain to really help the environment, to drive down -- consolidate loads to drive down the carbon footprint, to really drive technology and help a lot of these smaller businesses succeed and perform better. So we're really excited about that partnership. And now that the Court of Federal Claims is over, and we're fully awarded and fully funded, and we're up and ramping right now, and it's going to be a really fun next couple of years.

Yes. When does -- just so we know, when do you think it gets to full kind of steady state?

It's a long ramp. We've got about 9 months to develop and implement and test some of the IT backbone. And then we'll start taking moves on next fall, and that ramps up domestically over a period of time. But we'll be full ramp really the end of '24 and into '25.

And is there any change in like the contract terms? Is it still maybe cost plus? Or any differences there?

It is a performance-based contract, so it is not cost-plus. We have opportunity for margin expansion over time. It's got a -- it's -- the good thing about it is it's got a lot of economic price adjustment clauses in there, which is critical in a supply chain contract. So we feel the risk reward on the contract is very balanced. And TRANSCOM has been just a great partner for us, and they want to see this succeed.

Terrific. Margin expansion is music to my ears here.

Mine, too.

So maybe the core part of the evolution has been the strategic M&A. Two recent high-profile deals and acquisitions, 1 in the U.K., Frazer-Nash in 2021, and then Virginia-based Centauri in 2020. Can you talk about kind of the rationale for each one of those deals?

Sure. Happy to, and you can join in, Mark, if you'd like. First, going back to the first one. Centauri was a great acquisition for us. It was bang-on strategy. We really bought into where space was going 4 and 5 years ago. We had a great NASA portfolio in the civil space, and we still do that today. But we really saw this emergence of technology, whether it was the cyber, the intelligence, the data analytics of what was happening in space, and we needed a bigger footprint, particularly in the classified world. And Centauri brought us all of those things. And so it's been a real great acquisition. We're a couple of years into that now. It's performing better than expected, fully integrated with our teams. We're growing really across the spectrum of emerging technologies, and we're doing rapid prototyping and things like directed energy. We're connecting through digital data, different systems from space, down to the -- to get the data into the war fighter's hands. So really great acquisition, right-on strategy, high-end employees, highly cleared, some nationally recognized experts in various satellite and different technologies to improve that data analytics. And then Frazer-Nash is just a continuation of what we've done in the U.S. So that -- part of our transformation story, we were a traditional kind of logistics-oriented company, and we really wanted to move upmarket into high-end technology. And we did that in the U.S. in Government through acquisition, and we've been on that same journey internationally, really first starting down in Australia. We've had several acquisitions in Australia over the last several years. And then Frazer-Nash brings that high-end consulting. And they have both an energy -- advisory and energy transition part of government as well as the defense and space advisory service as well. So much like you've seen us do in the U.S., we believe our allies are following those same macro trends. And we continue to invest in that international business, both in the U.K. and Australia. Anything to add?

Adding to our global positioning, I'll also say that we've been in business in one shape or another over 100 years. A lot of people don't know that, both commercially and in the government side. For -- the government is actually the newer part, but the bigger part today. But we're very adept in getting joint ventures, alliances, not just all about M&A. M&A is capital-intensive, but we've achieved a lot of great things with it. And another good example recently that you did not mention, Peter, that we're really excited about is Mura. So in our Sustainable Tech business, every single offering we have today is either safer or it is more energy-efficient in terms of the industrial process that occurs, and/or it delivers a better environmental impact at the end of the day, and it makes more money for the customer, which they really like. And so several years ago, I was in a meeting not too far from here, and we talked about the failure of plastics recycling in this country and how little of what we use is ultimately recycled, like 10% to 15% on a good day. And so we embarked on a mission to find the very best technology that could change the game, and we really think we found it in Mura. So about almost 2 years ago, we signed an alliance and a minor investment with Mura to help them develop the technology, which is using water steam to break this plastic down to its core molecules, and then you reuse those molecules back into fundamental reproduction of the same over and over again in a circular sense. And so we've upped our investment recently. We are helping them industrialize. We're helping them actually projectize the assets they're going to put in place to bring this to reality. They have partners along with us like Dow and CP Chemical, which means Chevron Phillips. And so some big players have been involved and really trying to shape the world in a positive way as we do with the rest of our Sustainable Tech business. And so this drives a lot of passion in our people. It helps us recruit. But at the end of the day, it's all about doing better by the plan, and we think we've got a good shot here.

It's a terrific segue because I was going to ask you about kind of your ability to compete for human capital. So obviously, M&A, filling in a lot of gaps and broadening your global reach. But maybe just talk about, it's obviously a competitive landscape to attract people, what are you doing differently and how are you doing on that front?

I think there's a couple of elements, and I'll ask Byron to chime in here. Culture is where this starts. Now it is more difficult out there in the labor market. We see that. But the workforce of today wants flexibility and things like that, and we offer those things you would expect us to do. But they really want to bond with their employer. They want to relate to what the employer is doing for their customers and for the grander world, if you will. And so we start every single meeting -- ever since I've been there, not just since ESG was invented, but every single meeting for the last 6 years, we start with a Zero Harm moment. And we talk about how can we act in a more safe fashion, in a more sustainable fashion, how can we be more socially just, and how can we give more to the communities. And we take a time out to think about those things and improve on those things. And the workforce of today and the smart folks want to be associated with a company that cares about them so much for their own safety and for the safety of the plant within which we all live. That matters. And that's built a bond that is cultural for us, and it also puts more energy into our ultimate deliverables through our projects. I think being global is a big advantage we have, particularly with some of the folks that play in the national security space are very domestically focused. But we move people around globally. We prosecute our business using people from all over the place and do so for various reasons, and we have a marvelous diverse workforce as a result of that. And we use their ideas every day. We're a very flat organization. We're very approachable as a leadership team. We're very humble. And some of our greatest ideas come from faraway places and at all levels. And we listen, and we act. And that's really shaped our strategy to shape our culture, and I think that's really improved our bond. And then when you have such a huge footprint at NASA, that's always a sexy sell, right? And when you're changing the landscape on environmental outcomes with some of the biggest national oil companies or international oil companies and helping them get to a better place from an environmental perspective, that's cool, too. And a lot of our government folks think that's neat. And so we attract people on both sides by what we're doing on both sides.

Yes. Terrific. That's a great answer. I wanted to go back to M&A because I did want to ask, just when you look at it, though, in trying to broaden out your -- what is kind of the focus? Is it geography? Capability? I'm sure it's all of it, the customers. Maybe walk us through kind of the M&A strategy, the approach.

We've always been constructive on M&A. But as you know, organic growth drives the day from an ROIC perspective. And we've had great organic growth, 10%. That's before HomeSafe, which will propel that going forward for quite a bit of time as we ramp up. And so organic growth remains #1. Where we can augment with M&A in a very smart, deliberate but disciplined way, we'd do so. I would say we're focused on security, whether it's national security or energy security is up for grabs, if you will. We're focused on better environmental outcomes. We're focused on global, and we're focused on impactful. And we're -- we'll be very selective. We've reached this level of scale that allows us to operate and have a lot of capabilities and a lot of synergies. Don't have to do anything. But when we find little tuck-ins, we'll do that.

Yes. So I'd be remiss of not getting a chance to talk to Chief Financial Officer about your capital deployment discussions, how you approach kind of in the current public market environment and what's KBR's approach when we think about 2023 and moving forward.

It does evolve as your company evolves. But as we have achieved the transformation that you referred to earlier, which was very M&A-focused, we don't have that same degree of dependency anymore. So we now have a very balanced capital structure. We're very happy that we have made the acquisitions we've made, digested them, integrated them and here we sit at a leverage ratio sub-2. So we deployed a lot of capital, but we've managed it well. So we have a really strong balance sheet. We have a lot of firepower. But as I said, we'll be very selective in deploying that. We've launched a dividend a few years ago, and we've increased it every year since then at double digits. And we'll continue to do so as our net income and free cash flow grows. And by the way, free cash flow tracks 1:1 with net income, which is a really nice place to be as a CFO. So I think, at the end of the day, you'll find KBR doing some M&A, some buybacks, ongoing dividends, and we'll manage our debt very carefully, particularly in the type of market we're in today. So we're being pretty conservative on the leverage front right now for obvious reasons.

Yes. And then, just also, we've heard a lot today about venture-type investments. As KBR, I know you have JVs and things, but how do we think about that?

As Mark mentioned, Mura is 1 example, where we took an equity position in a technology and because we felt we could add real value to Mura, either modularizing, creating more closed-loop systems and the real solutions that we can provide there. But yes, we're very open to alliances and partnerships. I mean, obviously, we're at a scale now where we are a prime contractor, and that's our preferred position to win just directly organically. I love winning work as a prime contractor, but the landscape has changed. And a couple of examples. In commercial space, a lot of the new space technologies are coming in. We partner with many of those companies. We're just recently in a partnership, where Axiom Space won the new space suit, so xEVA. So we're a partner on that team. We're helping design and develop the pressure suit garment. And we've trained every astronaut that's ever gone to space, including all the new commercial astronauts through our Space Act Agreement with NASA. And so we're applying a lot of that human performance knowledge with Axiom to help them build out the next-generation space suits. So that's an example of a partnership. But also, in our industry, in the government industry, small businesses a big piece of the industry. And if you're not playing in that side even as a large business, you're missing a lot of opportunity. And recently, we just won a $4.3 billion contract, multiple award, in a joint venture with -- that we called Xandar, with a small business that is really focused around National Air and Space Intelligence Center, our NASIC work, it's called NOVASTAR. And so that's work where we're taking foreign military assets and exploiting them and helping the government exploit them and understand them in a different way. And so, again, I think partnering with small businesses, partnering with new space companies, investing in very specific technologies where we can add value, we're very open to all those kind of ventures to keep driving margins and really keeping us on that forefront of really exciting and meaningful work.

Terrific. Well, we only have a minute left, but maybe just key takeaways. What should investors and strategic people thinking about KBR as we think about 2023 and beyond?

An important challenge for investors is to understand us. We are unique. We are in 2 industries. We have changed a lot, and the world is changing a lot. And so getting your arms around KBR is no easy feat, but we'll keep communicating as best we can. We think there's unlocked value in KBR on both sides of the businesses that, through greater understanding, will eventually be appreciated. In terms of going forward, we have some pretty big things to deal with in-house, HomeSafe being 1 of them. We've also, in response with what's happening in Europe, energy security is obviously front and center. And the appetite for LNG and moving energy sources around the world, we're very active and always have been very active and experts in all of that. And so we're really ramping up those capabilities around the world to meet the energy consumption needs of the world. And that's an exciting place, and it's an important place to be. So we got that going on. We have a huge pipeline of new opportunities that many of which are awaiting award, like everybody else, or awaiting spend, but we'll be ready to tackle those when they come. And we've got a great balance sheet to put to work, but selectively so. So we're going to stick to -- the culture is #1 at KBR. Our ability to deliver for our customers is in sync with that. And really, making the most out of these energy transition opportunities, may be the most singular exciting thing because it's just -- it's globally important. It's increasingly globally funded. And with our ammonia technology, which is a major enabler to the clean economy of the future, the plastics recycling, many of the technologies we have that are proprietary to us can really shape that whole outlook in a favorable way, and we want to be a big part of it.

Terrific. Well, thank you very much, Mark, Byron. Thank you, everyone, for joining us. Really exciting things from KBR, I think, headed in 2023. So thank you. Thank you, again, for listening.

Thank you.

Thank you.