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

Welcome. Thank you for joining us today at our virtual STS Primer event. We look forward to sharing an inside view to our incredible Sustainable Technology Solutions segment. But first, I would like to cover some important disclosures. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on the slide. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward-looking statements, as discussed in our most recent Form 10-K available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is available in our most recent press release and earnings presentation posted on kbr.com. It is my pleasure to now hand over to Stuart Bradie, our President and Chief Executive Officer.

Thank you, Jamie, and welcome. Today, we're going to exclusively focus on our Sustainable Technology Solutions segment, or STS. Our objective is to present in more detail why we believe STS is indeed unique and give shareholders the opportunity to invest in an IP-based enabler of the energy trilemma. Now as you're aware, KBR actually reimagined our whole energy-facing business in 2020, with a clear sustainability focus, placing technology and domain expertise at the heart of our offering while leveraging our global presence, digital skills and significant installed base. Now the results have been exceptional and well above our initial target of doubling EBITDA by the end of 2025. And today, we're going to articulate the why and the how. And we're going to explain the market drivers that have enabled our growth, have delivered outpacing margin enhancement and our impressive cash performance. Now these market forces and frankly, societal drivers are indeed enduring. And our resulting bookings will demonstrate the noncyclical attributes of this business. Now make no mistake, sustainable technology is a long-cycle business, especially when one takes a portfolio approach, combined with a globally significant installed base. Now we will also break down our margin composition and will show you in more detail the geographic mix and how this is growing in countries and regions where we have significant strategic advantage and presence. And we'll explain and show our key customers and why traditional and new market entrants really have as exciting for the future and why what we offer, combined with trusted delivery excellence results in continued repeat business. So in short, we believe the value of STS is very much underappreciated in our stock price, especially as the relative percentage of KBR's adjusted EBITDA is made up with an increasing contribution from STS. This is largely due to the unique value proposition, which, of course, we recognize we needed to explain more concisely, which is what today is all about. Now to kick us off, our marketing and comms folks produce what we think is a critical video that helps describe in a fairly simplistic way what we do and, of course, thus, how we make our money. [Presentation]

Hopefully, that was helpful and should give context to what we do, and I'm going to build on that a bit, which takes us nicely on to Slide 7. This slide depicts clearly how we think of our business and actually how we go to market. So in the center circle, at the heart of what we do, is our portfolio of IP, knowledge, proprietary data and know-how. Now this includes technologies, and we've discussed these many times before, like plastics recycling, sustainable aviation fuel, olefins, ROSE, ammonia, ammonia cracking more recently, et cetera. Now it also includes a deep domain knowledge and know-how on things like next-gen LNG, decarbonization of energy security, digital engineering, remote monitoring and our proprietary integrated project management systems and tools. Now our customers, they come to KBR because of our specialist knowledge, IP and capability, but they also come because we augment that and augment our offering with specialist services that really help our customers realize their objectives from concept into feasibility, delivering value with decarbonization, by increasing energy efficiency or reducing emissions or improving predictability and speed to market via digital optimization and techniques like modularization. Now speed to market is actually a critical success factor for our customers today. And there's a natural synergy between sustainable technologies into sustainable solutions that deliver unique value. Perhaps the easiest way to think about this is that KBR operationalizes IP concepts, delivering high-performing functional assets to meet our customers' objectives. Now as we'll show you in a moment, STS is a truly, truly global business, and we have been very, very deliberate to ensure we maintain a low-risk business model everywhere we operate. We avoid commoditized low-margin services, including direct hire construction. And of course, we completely avoid lump sum EPC. We do; however, have value-add roles across the asset life cycle. So now on to Slide 8 for more details on the life cycle. Now as you saw in the video, the life cycle has 4 phases. So here is a different, I guess, a more graphical view of those 4 phases. Now we fit in all 4 with both technologies and solutions. And I think we're uniquely offering end-to-end solutions. Now 75% to 80% is in CapEx and 20% to 25% is an OpEx-related spend from our customers. Now the OpEx spend keeps us really close to our customers via a significant installed base, which also helps with intimacy as our customers look to modernize or expand or decarbonize their existing assets. And of course, this whole process starts over again. So probably easy if I give you a simple real-life example. And hopefully, this will bring this to life a little bit easier. So I think most of you know of our investment in plastics recycling. So the technology is called Hydro-PRT, and we acquired the global rights to sell this technology. So in acquiring this technology, our technical experts identified areas to enhance the circularity and the efficiency of the offering by capturing and recycling the steam and heat. Now this not only made the solution more efficient but ensure the whole process was indeed sustainable. We then utilize our digital engineering understanding to modularize the solution, and this improved predictability and that's the improved cost and importantly, speed to market. But this also widened the proprietary equipment wallet for KBR and allowed us to exploit our supply chain management expertise. And if required, we can then assist the customer through project execution, supervising and using project management skills and tools to manage the constructor. And we can then assist with commissioning the system, training operators and can, of course, apply digital monitoring and maintenance capability throughout the OpEx life cycle. So how does KBR and our shareholders realize value? We, of course, sell the proprietary technology as a license to operate. Now we only sell this with the associated proprietary equipment and engineering, which again is valued to KBR. And then if required or wanted, we can sell the project management and commissioning assistance and that's sold as reimbursable high-value services. The remote monitoring system is sold as a software license, and any follow-on technical services is typically freight based. If the customer then wishes sometime in the future to expand the facility, we can then add another module, and that whole process repeats. I will now turn to Slide 9 to demonstrate at a very high level how this works at scale. Jalal explains the energy trilemma and how KBR is an enabler in exciting and enduring markets in a moment. But if we simplistically take the Mura Hydro-PRT example, and then apply the same go-to-market fundamentals. We have 80-plus protected technologies, which, as you will appreciate, have very high barriers to entry. Now we've strategically added to this portfolio over time, all with a very strong focus on sustainability. And we've also enhanced our existing technology and our know-how, think next-gen LNG and sustainable services solutions offering to ensure there are decarbonization attributes to all that we offer. Now this is a unique and a substantial suite of offerings. And today, we operate in 38 countries, so truly, truly global, with a highly motivated and technically skilled sales team, and that's very important. And this team is absolutely world-class. And this global presence and strength of relationships and understanding allows us to position for both global and local market trends and nuances. Our continued presence and delivery excellence has resulted in deep, long-lasting and trusted customer relationships. Now reputation in this business is absolutely everything, and we're very well known for developing, adding value and commercializing new technologies, making KBR the go-to company to help early adopters and technology developers. And that sounds great. But with that backdrop, and of course, the story, we should be delivering strong margins, and that's exactly what we do. We delivered over 20% in 2023 with terrific cash performance and excellent bookings giving future earnings visibility, which takes me nicely on to Slide 10. And here are some key financial highlights. Now you've seen some of this before. In 2023, adjusted EBITDA was $336 million, which was a terrific performance. And our CAGRs were well ahead of pace, as you know, but a really impressive. However, the key takeaway is that STS' adjusted EBITDA was heavily, heavily impacted by repeat business. Over 65%, which I believe really demonstrates the strength of our relationships and our delivery value-add focus, 65%. Our book-to-bill was also very strong throughout the year, well above 1, as we discussed during our Q4 earnings. And we closed with a backlog of circa $5 billion. Now Jay will show you in a moment how this gives great line of sight to future earnings. Now you can see on the slide, our EBITDA mix is a good balance between technologies and solutions and on contract type. And the 5% fixed price is actually services with a defined scope and level of effort. So this gives a bit more detail on how our low-risk business model is in practice. So in short, this is a high-growth, high-margin, low capital-intensive business. Our geographic presence, our customer focus, our product portfolio and access to both CapEx and OpEx funding ensure that we mitigate cycles. Unique, a word we used earlier, I think, is very fitting. With attributes shown on this slide, STS, we believe, is very much undervalued. Now on to Slide 11. Now in no particular order, we have plotted who many believe are our peers. So on the left, you have typical services players and EPC players. Next, you have EPC companies who have some technology, and they often try to leverage that technology to win larger EPC, often lumpsum EPC contracts. And then on the bottom right, you have technology peers. Now some have made progress from a sustainability perspective, others less so. Most of these; however, are privately held or contained within much larger conglomerate. So we believe that KBR is indeed unique. In 2020, we repositioned our business to deliver sustainable solutions. As I stated earlier, we exited commoditized services and high-risk activities like lumpsum EPC. And as I have explained, we add value by deploying industry-leading and differentiated IP know-how and digital solutions that are intrinsically linked to high-end sustainable solutions that really improve speed to market, reduce carbon footprint and increase efficiency for our customers all across the world. Now the resultant significant value add to our shareholders is clear. And we are the only public listed company with a clear sustainability focus that delivers IP digital solutions and sustainable services at scale. Are we peerless, perhaps from an intrinsic value perspective, but our top quartile growth, low-risk business model and double-digit margins really sets us apart? Now certainly, from a multiple perspective, this is a business that is clearly undervalued given these attributes. On to Slide 12. Now we've talked quite a bit about margins. So we thought it would be helpful to give a breakdown of the relative contribution and realize margin for the component parts. And the titles line up with what I presented with the circles earlier. Now the numbers are pretty self-evident with sustainable technologies, delivering circa 25% EBITDA margins and making up about 40% to 55% of the overall STS EBITDA mix. Now this includes license sales, which are typically very high margin sort of near 100% and the associated know-how and proprietary equipment. And then the Sustainable Solutions piece delivers about 15% EBITDA margins and makes up the remaining 45% to 60% of overall STS EBITDA. So in total, this results in delivering circa 20% margins, as you've seen. Now as we sell or add more technologies and know-how and digital solutions to the portfolio, the level of proprietary equipment and services around the circle also grows. Now I guess this would indicate that the mix over time could favor services. However, in that case, we would realize economies of scale across the sustainable services portfolio due to a relatively low fixed overhead. And as such, we actually expect overall margins over the medium term to be pretty constant. I will now hand over to Jay, who will give you more detail on what has been driving our growth and why we believe the outlook is very, very bright. Jay?

Thank you, Stuart. On to Slide 14. The energy trilemma is the global challenge to reliably meet the growing consumption of energy while balancing the need for affordability and sustainability. These 3 dimensions, more energy, cleaner energy and affordable energy are often seen as opposing challenges, but achieving balance is vital for providing the people of the world and affordable quality of life while achieving net zero goals. Demand for energy is growing across the world. As populations grow and more economies are developing, which brings a higher per capita consumption of energy. The Southern Hemisphere economies seek greater mobility and consumption of goods all derived from energy products, well, Northern Hemisphere economies are maintaining demand. If this increased demand is not offset by innovative new technologies, capabilities and energy efficiency elsewhere then global energy consumption will continue to grow year-on-year. It is worth noting that over 70% of the energy we use today is from single source energy sources of fossil fuels with the top 3 sources of energy, all being hydrocarbon-based, oil then followed by coal and natural gas. The Russia and Ukraine situation has amplified the interconnectivity of the energy supply and its flow down into food security and national security. KBR is at the forefront of the energy trilemma by providing innovative solutions and energy security as well as new low carbon energy to meet this additional demand and gradually displacing existing fossil fuels in the energy mix. KBR has the global presence working with the integrated energy companies and the national oil companies in the Eastern and Southern Hemisphere across the energy trilemma. The energy trilemma has highlighted KBR's competitive advantages, which include a large installed base, relevant experience, delivering scale and complexity and clients that have the trust and confidence to sole source awards to KBR. Our proprietary sustainability offerings are built on our differentiated IP and domain expertise. We deliver best-in-class OpEx and CapEx performance with digital solutions for true end-to-end solutions. We also deliver in the most commercially ready markets such as green or blue ammonia, waste plastic, circularity, sustainable plastic and sustainable aviation fuel and more. The know-how KBR brings our client, not only makes the energy transition more affordable, but cleaner through delivering these solutions to market quicker and safer with our first-to-market leadership and resulting in impactful positive changes to the environment. On to Slide 15. As shared during our earnings call, STS diversified portfolio accelerates our growth through the power of [indiscernible] because of this, KBR is able to deliver, in both traditional gray energy vectors and new blue or green energy vectors and at world scale with the leading national oil companies and international energy companies. And with first-of-a-kind scaled energy system of tomorrow and in any region of the globe regardless of where they are in their journey to addressing the energy trilemma. Looking at the traditional factors, the areas of continued growth, support and security and affordability are reaching giga-scale in vectors where KBR's long-standing experience is without equal. While within the new energy vectors, KBR is scaling and deploying solutions to address the most current and necessary challenges in the energy transition, such as sustainable aviation fuel, chemical recycling of waste plastics as well as blue and green hydrogen and ammonia. KBR's leadership position across these markets reinforces its trusted position with the clients regardless of shape, size or location. On to Slide 16. This is another key dimension of why KBR is the unique player in the market and equally important to where we make our money. The energy trilemma is global and so is our presence, given a white canvas for STS to provide innovative and affordable solutions. Our playground is the globe, and our presence adapts to fit the spend and the market trends. The challenges vary across the globe, both regionally and temporarily. So we offer our solutions where there is appetite. Our offer in Iraq is a better quality of life for the Iraqi people, by capturing the flared gas for use in power plants rather than increasing greenhouse gas emissions. Our offer in Saudi is to expand self-sufficiency through replacement firing, oil and power plants with cleaner natural gas and converting oil into more recyclable chemicals. Our world-leading technology in ammonia continues to provide the bulk of fertilizers across the globe, supporting humanitarian aims. No matter how big or small the project is, no matter where it sits across the energy trilemma, no matter which geography it is in, KBR is ready to deliver the investment as long as it fits our strategy, our focus and our discipline. As we have confirmed previously, this does not include lump-sum turnkey, commoditized offerings or direct construction. Our risk profile is conservative with a focus on the bottom line. With the global demand growing so is our book of business. Every region has shown growth over the years presented with the exception of Asia, which was flat due to geopolitics. In summary, we are well positioned in high-growth geographies with double-digit outlook at revenue and EBITDA. Now into Slide 17. We work in a trusted partnership with major blue chip customers and developers across the globe. The size of the bubble shows our top customers in 2023 and the circle denotes relative scale in adjusted EBITDA. With over 65% of our [indiscernible] from repeated customers, it's proof of the trust and confidence that our customers and partners put in KBR. With ADNOC, we are the #1 project management consultant, an integrator where we are currently managing over USD 100 billion of a project with about 700 people dedicated to this successful program. With Shell, we are working on their pathfinder project to provide low-cost energy solutions. With BP, we work in Iraq and energy security projects. And in the U.K. where we are their integrated project management team for blue and green solutions. With Aramco, we are executing engineering, design and project management for projects that are over USD 100 billion in value related to sustainability and diverse the product state. With Stanch in Nigeria, we are providing our world-leading technology in ammonia. With LyondellBasell, we are working in circularity. With Woodside in liquid hydrogen and LNG. With DuPont, we are a major player in executing all the engineering projects and support along their journey in transforming from a specialty chemical company to a specialty material company. With Energy Transfer, we are working in olefins and LNG. And with [indiscernible], we are working on offshore production. Hopefully, what I just shared demonstrates our long-term sticky relationship with a broad range of mega customers across the globe across the energy trilemma. On to Slide 18. Our IP and technology is the crown jewel for STS. Here is our 14-year history showing the tremendous growth in commercializing externally and internally developed technologies. We have grown from 10 technologies to 80-plus technologies in less than 15 years. In 2023, we have commercialized 9 new technologies and every single one is ESG focused. Our technologies are all globally relevant and they play and provide an innovative and affordable solution to resolve the challenges in the energy trilemma. These technologies are all diverse, mitigate risk of regional instability or end-market cyclicity. Through partnership and alliances over the last year, KBR has obtained ACETICA, technology for the production of acetic acid, which combines methanol with syngas utilization of CO2. KCap, KBR's carbon capture solution is an innovative rotating packed bed [ PAQ ] design that replaces large distillation towers with an electrified solution, particularly relevant for retrofit and CO2 capture and to operate in logistically limited existing assets. PureSAF, KBR's industry-leading sustainable aviation fuel solutions alongside our partner Swedish Biofuels. With numerous paid studies underway, KBR is expecting accelerated market uptake similar to the pace of our Hydro-PRT offering. Purifier A for those clients who are looking for ammonia technology based around autothermal reforming to meet local conditions. KBR has partnered with [ Air Liquide ] to integrate their leading ATR into KBR's deed in ammonia technology. And internally, KBR has developed H2ACT which stands for hydrogen 2 ammonia cracking technology. The only ammonia cracking solution that has been licensed at commercial scale. SCOREKlean, and near-zero CO2 footprint ethylene technology based on KBR's score technology and its best-in-class yields. PureLi, purification of extracted lithium intermediates into battery-grade lithium. [ H2K Plus, ] blue hydrogen based on KBR's industry-leading blue ammonia designs. PureM green methanol technology, which is uniquely a CO2 usage technology, which furthers the circularity of CO2 and reusable products. On to Slide 19. For our profit source trajectory, we play across the 3 horizons, which have significant and long-term visibility. This is our book of business and our pipeline for opportunities. The colors represented in adjusted EBITDA. The dark blue is profit expected to come from framework, master service agreements in place today. The yellow is profit coming from long-term projects that last 2 to 5 years. The light blue is profit expected to come from short-term projects less than 2 years. The remaining is a new business and is included in our pipeline. 2024 is off to a great start with more than 85% of work secured in our book of business to meet the annual guidance. And we have work underway now, which even extends beyond 2025. We have a bit of tailwind in the market across the energy trilemma, having sticky customers who have the trust and confidence in KBR ensures this business is resilient and not cyclical. On to Slide 20. The current STS business represents a highly derisked low capital intense, high cash generative, know-how lead solution provider across the life cycle of a project. In sustainable technologies, the fees paid are unit price and predominantly paid in advance. Our equipment modules and catalysts are manufactured through back-to-back structured contract with a narrow range of trusted vendors, who fabricate these critical pieces of equipment to KBR's design standards. Therefore, the risk profile of the technologies PSL is very low risk. Sustainable Solutions have been derisked through our exit of direct construction work as well as lumpsum turnkey type contracting. Our consulting and engineering services offering are sold with profit and overhead built into time and material type reimbursable format, all of which are extremely low risk. As we have continued to remind, we have a highly derisked suite of services led by the detailed engineering, master services agreement type work and program management presenting very low risk profiles to KBR. I'll now pass it back to Stuart to wrap it up.

So on to Slide 21 key takeaways. So let me leave you with just a few key thoughts. STS is unique. It is very well positioned for continued growth and margin performance. The market outlook, our IP portfolio and sustainable services attributes, trusted customer focus and global presence, mitigates volatility and cycle risk. Backlog has been increased by winning the right work to give visibility of future earnings with strong underlying book of business over the medium term, which Jay presented earlier. And as I said earlier, STS adjusted EBITDA contribution was circa 40% of KBR, and this segment is now at scale to be considered a highly meaningful part of KBR, a highly meaningful part that up until today has been underappreciated. And hopefully, today, we went a long way to address this. So thank you for listening. And no doubt, we'll be talking in a little while. Thank you. Bye.