KBR, Inc. (NYSE:KBR) Q4 2023 Earnings Call Transcript
KBR, Inc. (NYSE:KBR) Q4 2023 Earnings Call Transcript February 20, 2024
KBR, Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $0.68. KBR, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Drew and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Q4 and FY2023 KBR Inc. Conference. [Operator Instructions] I’ll now hand over to Jamie DuBray, Vice President of Investor Relations. Please go ahead when you are ready.
Jamie DuBray: Thank you. Good morning, and welcome to KBR's fourth quarter and fiscal year 2023 earnings call. Joining me are Stuart Bradie, President and Chief Executive Officer; as well as Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on the Investors section of our website @kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on slide 2. 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 included at the end of our earnings presentation. I will now turn the call over to Stuart.
Stuart Bradie: Thanks Jamie, and a warm welcome to a 2023 yearend earnings presentation. I will start on slide 5. As we reflect on 2023, I wanted to begin today with a theme of looking after our people. Creating an environment where each and every person can go home after work at a minimum, the same as when they started the day, is very personal to myself and the whole leadership of KBR. A Zero Harm program is only as good as our processes and of course our people being committed to our values every single day. I'm therefore pleased to report that once again we achieved top quintile results, an outstanding achievement given what we do and where we do it. So a huge shout out to KBR’s people all across the world. There are a number of achievements and milestones that we have celebrated through the year as examples of this exemplary performance on the slide.
I won't read them as there are many others, but this gives us a good feel for the global and complex nature of what we do and why we are so proud of our HSSC performance and ongoing commitment to continual improvement. On to slide 6 on business health. I will focus my remarks on the full year performance and outlook. I will also give you an update on HomeSafe. Mark will cover the quarter results, which are once again resilient. We met or exceeded expectation on all key metrics. Mark will also break down the year a bit more and present, of course, on ‘24 guidance. On the people front, we increased our headcount by double digits, which is aligned with our organic growth. Pleasingly through the year, our attrition reduced and through independently run surveys, I'm proud to report that KBR is now certified as a great place to work in 16 countries.
This is a direct result of the emphasis we place on valuing our people. We are, of course, not perfect, and we will in ‘24 and beyond ‘24 strive for continual improvement and deliver even greater investment in our people. But I think it's important we must also recognize the ‘23 performance. Talking of recognition, you can see some of the awards we received during the year. And importantly, these were all assessed independently. On Zero Harm, we've already covered the safety stats. From our people survey, you can see that our people truly believe that we are committed and do care for them and about them. As you're aware, our unique ESG position allows us to deliver shareholder value in addition to fulfilling our ESG goals. These align with UN Sustainable Development Goal No. 7, which is affordable and clean energy.
And as you'll see on the slide, we've listed an example from each of the businesses. In GS-US, we support the FAAVAL project designed to achieve cleaner emissions from airport ground support equipment. In GS-International, we support the UK MOD with testing of zero-emission military aircraft. And as you know, in STS, we have many sustainable clean energy technologies, which help some of the largest organizations in the world deliver cleaner environmental outcomes. Moving on to business growth. Now, these are the metrics around work winning. Overall, trailing 12-months book-to-bill was 1.1x. And as you would expect with this result, backlog was up 10% year-on- year to $21.7 billion, including options. This provides great visibility of future earnings potential and importantly, excludes HomeSafe, there are more positive news on that in a moment.
In terms of 2024, this translates to 75% of work under contract as we start the year. Given in a typical year, we also execute 15% to 20% of our revenue on smaller or short-term consulting contracts, plus of course, ongoing contract growth. This is a very solid basis for the year ahead. On to group financials. Strong organic growth at 11% ex-OAW, a fantastic performance in its own right. But more impressive was the associated adjusted EBITDA result. We delivered 12% year- on-year adjusted EBITDA growth by increasing margins to 10.7%, an outstanding result. On to cash. We settled the convert and warrants in cash as promised. Not only avoiding dilution but reducing our share count, truly delivering on our commitment to maximize shareholder return.
This was all possible due to excellent cash management and strong treasury and tax management with adjusted OCF conversion at 117% for the year, absolutely outstanding. So in short, we met or exceeded expectation across all key metrics for the full year. Revenue growth, adjusted EBITDA, adjusted EPS and of course cash. Our book of business underpins our continued momentum in growth. Our vision is to deliver technology and increasingly higher end technically differentiated services in attractive end markets that matter. Safe, secure and sustainable. We continue to realize our vision, continually moving away from markets and business models that become commoditized, growing a technology portfolio both in GS and STS, and ensuring we operate more in the differentiated services market.
This of course should result in enhanced margins over time, which was clearly the case in 2023. All of this was achieved in quite a volatile year, not only geopolitically, but also fiscally, especially with increased interest rates. On to slide 7. I'm not going to spend too much time on these slides as the markets we discussed last quarter and in fact most of 2023 remain unchanged. You can see three awards on the left demonstrating how engaged KBR is across sustainability in all aspects of the energy trilemma. STS book-to-bill on a trailing 12-month basis was 1.1x and excluding the large LNG project, which of course has a large burn, the trailing 12-month book-to-bill was 1.2x. I think a really strong indicator that STS, both in technology and sustainable services continues to grow and win work in critical areas aligned our vision.
The margin performance demonstrates this, which Mark will cover in a moment. As a reminder, we have a number of inbound requests to do a deeper dive on STS. Why has it grown adjusted EBITDA 50% year-on-year? What is the book of business and how does it work off to demonstrate the non-cyclical long business attributes? How do we make our returns and what other key markets going forward and their accolade. Our intent to present a focused, I guess what we're calling an STS Primer the Week of March 11th to answer these questions. The objective is to increase investors knowledge of this business before we go into an Investor Day at which our focus will be very much on future direction, increased synergy, and the potentials going forward. On the government side, in a year of volatility, both internationally and domestically, the team did an amazing job.
GS book-to-bill on a trailing 12-month basis was 1.2x. We have highlighted some example wins that again show the realization of our vision. Firstly, in technology, directed energy via DEM-Shorad, high-end consulting via Frazer-Nash, working with the UK government, showing very strong synergy with STS. And thirdly, absolutely great performance via highly differentiated services leading to extended scope on the Preservation of the Force and Family contract. KBR is very well positioned in key markets that post-appropriation we expect will be well funded. Now on to slide 8 and HomeSafe. Last quarter, we recognized that we delivered a status update that was devoid of clarity. It was the truth, but we also recognized the market does not like uncertainty.
As you can well imagine, our team and TRANSCOM have been working very hard together to provide more clarity. We created a joint Tiger team with TRANSCOM to improve the integration of government and contractor systems. We added additional leadership with specific operational expertise, and together we are partnering with individual services branches to drive organizational change management. We are jointly committed to a successful path forward and feeling very upbeat. I am thus pleased to report that round one systems testing was completed successfully in January. Now this clears the way to starting operational test moves at the local level in spring of this year. The volume ramp will be in a controlled manner through the year with the expectation of significantly ramping up into 2025 especially the busy season and international moves will then follow as we head into 2026.
So in short circa a delay of one year. Now remember this is a nine-year program so although a delay is always frustrating, I believe it has allowed both sides the time to de-risk the startup and of course the ramp which ultimately is a good thing. In addition, we have reached contractual agreement with TRANSCOM on an extended and funded establishment and test period which covers HomeSafe’s project management and development costs up until we reach a sufficient volume of moves, therefore insulating us from carrying overhead costs before higher volume moves get underway. Now I've seen some reports and quite a bit of media noise on the supply chain side of the moving and transportation industry. Firstly, I'll start with emphasizing the intent of this program is to redefine the moving experience of our military personnel and their families.
Secondly, it's to deploy an IT backbone with intelligence to retain data and knowledge that allows for optimization and importantly accountability. To achieve this, we require a certain level of disruption and of course disruption leads to change. To demonstrate the maturity of the supply chain development for the contract, here statistics on the current state of a supplier network. In the HomeSafe digital supplier management system, we have over 2, 200 suppliers registered as of today, of which 380 have already fully executed contract agreements which can provide 100% coverage of our current service areas. And we have several large van lines also committed to the program once we get to higher volumes. The new global household goods contract is not only limited to current DoD approved providers and will be open to a broader set of the transportation market.
We intend and commit to being entrepreneurial and innovative, attracting not only traditional van lines and owner operators but also non-traditional providers to do moves in a more efficient manner. I suspect the supply chain will change in areas and there will likely be noise as a consequence which is only to be expected. Both HomeSafe and TRANSCOM are committed to these outcomes which include paying a fair and reasonable rate to service providers rewarding those that perform with additional volumes, including small businesses, of course, and providing better services to our DoD families. So what does this mean for 2024? We have a more defined path forward and are in a much better position given the recent modification agreement and supply chain developments.
We intend to set initial ‘24 guidance with a very conservative view of HomeSafe. With local test moves beginning in the spring, we expect nominal amount of revenue circa $125 million to $175 million during the year. With profits, as we've guided before at the mid-single digits and increasing over time to align with our GS margins today. Of course, we expect volumes to ramp considerably in 2025 with the domestic busy season, and again in 2026 as international moves are added. One quarter is sometimes a long time in business and clearly there has been significant progress since Q3. And I want to be very clear, we're extremely upbeat about HomeSafe and what it can deliver to men and women in uniform, but also to our shareholders over the years ahead.
I will now hand over to Mark who will cover the quarter, the year in a bit more detail, and of course, ‘24 guidance. Mark?
Mark Sopp: Great, thank you, Stuart. Hello, everyone. I'll start on slide 10 with the Q4 results, then I'll hit fiscal year results, capital structure matters, and then finish with our guide for 2024. So first up, we were pleased to finish fiscal 2023 with a strong Q4. Top line grew 8% in the quarter, all organic, with amplified growth and profit. Adjusted EBITDA was up 20% with contributions from both business areas in volume and also in margins. I'll hit the drivers of this when I cover the segment slide here in a moment. Adjusted EPS was $0.69 for the quarter in line with expectations. Q4, ‘23 adjusted EPS does reflect considerably higher interest cost and a higher tax rate than the prior year quarter. Operating and free cash flow results finish strong, enabling a terrific full year outcome.
As Stuart indicated earlier, cash performance was critical in building our treasury to enable us to fully settle the convertible maturity and warrants and get that out of the way as we enter into 2024. Over to slide 11, for the full year all metrics were on or above our plan and also consistent with our long-term targets, so we're very pleased with that. Revenue was just about at $7 billion for the year, just a hair under, up 11% over 2022 on an ex-OAW basis, and up 6% without that adjustment. Adjusted EBITDA grew to $747 million, that's up 12% over last year, driven by 50 basis points of adjusted EBITDA margin improvement. This improvement was attributed to excellent project execution across the board and greater growth contribution, favorable project mix, and economies of scale from sustainable tech.
Adjusted EPS was up 7% for the year and in line with our original guide for 2023. In the end, it was pleasing to see our operations over-perform on the EBITDA line to offset about $20 million of unplanned headwind in interest expense. Operating cash flow of $463 million was one of the highlights of the year. We over-performed here relative to our guide with more client advances received in STS and better than expected accounts receivable collections across the board in Q4. The team really worked hard and well together to lower DSO all year and also negotiate favorable cash terms on new contracts. This result underscores our quality of earnings and also client satisfaction across both segments. As I will discuss further in a moment, advances and strong collections are probably accelerations to some degree, so we expect to see some flip side of this in 2024.
Now on to slide 12 for segment performance. I'll start with STS. As we have mentioned a number of times, our focus in this segment is EBITDA growth, which includes after tax equity and earnings from unconsolidated joint ventures, for which we report no revenue. As seen on the left, Q4 was a continuation of a stellar year for STS. We're seeing strong global demand for energy security requirements, decarbonization solutions, and a new energy transition enablers that we provide. Our business model in STS provides a good demonstration of the ability to quickly convert demand to EBITDA in leveraging IP licensing, product sales, and quick ramp up on sustainable services all simultaneously. STS finished the year with ongoing growth plus superb margins and cash flow with new business bookings paving the way for more success in 2024.
Adjusted EBITDA growth was 42% in the quarter. All parts of STS are contributing to this result across offerings like licensing, equipment, design and engineering services, and also across multiple geographies and multiple verticals like ammonia, chemicals, olefins, and various emerging areas. For the full year, adjusted EBITDA was up 50% for all the same reasons as we had in Q4. Geographically revenue in the Middle East and Europe was up about 37%. US was up about 11%. And Asia and the rest of the world was up about 44%. So STS indeed is a global business. Over to the government segment on slide 13. Q4 revenues were up 6%, with adjusted EBITDA up 8% on improved margins. Growth drivers were Defense and Intel and also International up 22% and 15% respectively.
Within these bright spots were a resumed pace on DEM-Shorad, Stuart mentioned that earlier. Terrific growth in Defense and Intel on advanced technology projects funded under the RDT&E budget across our expansive IDIQ portfolio and also continued excellent performance by our Frazer-Nash technical consulting platform. Science and Space had modest growth with the Fed's SIV budget constrained by the continuing resolution. Readiness and sustainment pulled back with reductions in the European Command Theater. We tied this directly to the funding debate in Congress on military support levels to Ukraine. For the year, revenues were up 7% ex-OAW with margins at 10% in line with expectations. Earlier in the year, readiness and sustainment drove quite a bit of growth while Defense and Intel and International lag due to the DEM-Shorad delays now resolved and the government turnover implications in Australia.
As you saw in Q4, it's good to see D&I and International return to higher growth to offset the political issues we're dealing with in readiness and sustainment in Ukraine. This is a clear demonstration of the strength and resiliency of our well-diversified Government Solutions business. So that summarizes the P&L. Let's move over to slide 14 for cash flow and capital structure matters. In 2023, we used cash in three main ways. We retired two risks, the convertible notes and warrants, and also the legacy legal matter. The third use was returning about $210 million of funds to shareholders via buybacks and dividends. As Stuart said earlier, we were pleased to be able to lean forward and resolve all elements of the convertible either on time or in advance, and doing so without dilution so that we would not carry this overhanging to 2024.
So that's done. The convertible notes and warrants, the legal matter, and the return of capital to shareholders used about $950 million in cash. Quite amazingly, with adjusted EBITDA growth, strong free cash flow, and by tapping repatriated cash, we finished 2023 with a net leverage ratio of 2.1 flat from last year. No change year-over-year after all of that deployment. So we think this is quite an accomplishment and means we manage these various deployments without strapping us with burdensome debt going forward. In January of this year, with the convertible notes out of the way and with favorable signals that we got from the Fed in late December, actually, we jumped on the opportunity to refinance much of our debt. The details are provided in recently filed 8-Ks, but to summarize, first, we had a cluster of debt maturities in 2026 and 2027.
In the refinancing, we pushed those out to 2029 and 2031, mitigating our maturity risk substantially. And second, while keeping total debt neutral, we upsized the longer term maturity term, loan B, and freed up almost all of our $1 billion revolver availability. So that move enhanced the capital deployment option significantly moving forward. The combination of taking care of the convertible and refinancing of the loans is a boost to our capital structure and certainly better supports our growth strategy going forward. In terms of the strategy for capital deployment going forward, our priorities are not changed, but our options are clearly more robust with the recent actions we've just taken. For a long time, we have committed to paying an attractive level of dividends while also holding leverage levels at responsible numbers.
We've also sought to keep payout ratios relatively constant as we generate net income and free cash flow growth. In line with this and in conjunction with initiating our 2024 guidance with continued growth, we are increasing our annual regular dividend from $0.54 per share to $0.60 per share. This will take effect the next record date of March 15. This marks the fifth year in a row of increasing our dividend by a significant amount. Deployable capital after dividends will be directed toward either M&A, buybacks and or debt reduction based on our view of the best long-term contribution to shareholder value. And finally, to maximize flexibility, our board has just approved replenishing our stock buyback authorization to $500 million. I'll finish up with our guidance for 2024 on slide 15.
We are pleased to again set expectations for ongoing growth in profits and cash flow, reflecting healthy end markets, strong offerings and new business momentum coming out of 2023. We expect revenues in the $7.4 billion to $7.7 billion and adjusted EBITDA in the $810 million to $850 million range. The midpoint in the adjusted EBITDA reflects a growth rate of 11% over 2023. We expect adjusted EPS in the range of $3.10 to $3.30 which represents a growth rate of 10% at the midpoint. The adjusted EPS guide reflects about $15 million more of interest expense over 2023 primarily from higher rates. The guide also assumes a higher tax rate in the 25% to 27% range. As I said last quarter this is due to higher international mix. Share account is assumed at 135 million units which excludes capital deployment, but includes a modest level of repurchases to offset our annual share count creep.
As for timing, we expect about 45% of adjusted EPS in the first half, 55% in the second. This is due to expected timing of projects, including work in Europe due to the continuing resolution and funding for Ukraine as well as the HomeSafe ramp and the overall growth trend in our business. For adjusted operating cash flow, we exceeded expectations in 2023, which did include some cash advances in STS in Q4 and also strong collections in government as well. As said earlier, there's about a $20 million give back on this to 2024, but our guide is still up with for the range of $450 million to $480 million of operating cash flow for 2024. In sum, there are a few highlights worth reemphasizing here. First, we met or exceeded all key financial metrics in 2023 with overperformance in adjusted EBITDA generation, which I said offset some of the interest expense headwinds we had.
And second, over the course of 2023 and so far in 2024, we've de-risked our future in several ways. We continue to demonstrate superb cash flow production, which opened up opportunities to improve our capital structure for the future. That included settling our convertible notes and warrants and also settling legacy legal matter and finally extending and improving our credit facilities. The third point I'd emphasize is our core business momentum and recent bookings does indeed drive growth plans for 2024 and well beyond that. Those elements together enable an attractive growth outlook for 2024, a catalyst for attractive growth again in 2025, including a meaningful plans ramp on HomeSafe and a more flexible capital structure to expand deployment opportunities which represent an upside to our outlook.
Thanks for your patience through all of that. Now back to Stuart to wrap it up. Stuart?
Stuart Bradie: Thank you, Mark. Now, let me summarize with a few takeaways. Strong finish to full year ‘23, concluding an absolutely stellar full year. Backlogging options up 10% and adjusted EBITDA growth of 12% year-over-year with, of course, margin expansion. We have a de-risked 2024 and beyond with the convert and warrant settlement legacy legal resolution and refinance capital structure. The balance sheet is in real good shape, giving deployment optionality. A key takeaway. A more defined path forward on HomeSafe through continued partnership with TRANSCOM and positive supply chain developments. Over 75% work under contract as we start the year against a full year ‘24 guide that delivers double digit growth in both adjusted EBITDA and adjusted EPS midpoints.
With effectively no capital deployment baked in, which of course is an opportunity as we progress through the year. So committed to delivering sustained growth for KBR shareholders with adjusted EBITDA in line with our progression towards a 2025 target of $925 million EBITDA. Thank you for listening and I will now hand back to the operator who will open the call up for questions.
See also 12 Best Gold Mining Companies to Invest In According to Analysts and 13 High Growth Penny Stocks That Are Profitable.
To continue reading the Q&A session, please click here.
