Q4 2019 Earnings Call
[music].
Please standby.
I don't want to welcome to be KBR Inc. fourth quarter 2019 earnings Conference call. This call is being recorded as a reminder, your lines will be an they listen only mode for the duration of the call that will be a question and answer session immediately following prepared remarks.
Hey, Steve instructions at that time for opening remarks of introductions I would like to turn the call over to Vice President Investor Relations out some baskets. Please go ahead ma'am.
Good morning, and thank you for attending KBR fourth quarter in fiscal 2019 earnings call.
Joining us today are Stewart, Brady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer.
Stuart and Mark will discuss highlights from the here the market outlook, our financial results and our 2020 earnings and cash flow guidance.
After these remarks, we will open the call for questions.
Today's earnings presentation is available on the investors section of our web site at KBR Dot com.
I would like to remind the audience that this discussion may include forward looking statements, reflecting KBR views about future beds and their potential impact on performance as outlined on slide 18.
These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward looking statements.
These risks are discussed in our most recent form 10-K available on our website I will now I'll turn the call over to Stewart.
Thank you Allison.
I'll start on slide four.
As many of you know normally start off by talking about safety performance, which by the way in 2019 was again stellar.
But today, we want to broaden the cyclical.
That's the day in May of 2019.
Session by highlighting.
One.
KBR social outreach program really focused on engaging with local school children, who use.
Single use plastics.
It was designed to give investors real tangible example, sustainability efforts on making positive difference.
We believe that not only in the way that we behave as a good corporate citizen.
Also through the ones that we do the KBR has a truly differentiated sustainability opportunity.
So going forward, how desire is to share on high like more to stakeholders in this area.
Slide five so so in keeping with not message, we have broadened zero harm and college to care beyond 60.
As we believe it also talk shows our culture sustainability.
Clearly we believed that there is a symbiotic relationship between good business and good sustainability performance.
Now looking at the slide you'll see that health safety and security remains a key component of the sustainability platform.
No compromise looking after people.
But we've also identified a number of social and environmental focus areas for KBR.
We will present on a different one each time.
Really to try and give you real tangible things that we're doing as a company.
You know positive difference.
As we embark on bringing this together and identifying and collecting all the things we do across two beyond the level of passion of the breadth of <unk>, we actually do Santosh.
So I'm excited to introduce a sustainability program to date, but I'm looking forward to exploring some of the things we do on future calls.
In the meantime, I'd encourage you all to read up 2019 sustainability report, which is of course available on our website and this will give you a great insight.
Slide six.
Well, we met in late 2019, we presented a scorecard.
We committed to come back and show you how do we did so so here it is.
It looks pretty good.
Again, as I said and maybe the secret sauce to delivering there's really a culture.
That's really affect too so it was an exceptional people working together.
So the benefit of each other on one KBR and I would like to take this opportunity to cycle publicly for all that they do.
I think you're all well aware of the things highlighted but I would be absolutely remiss if I Didnt say this was the 12 quarter in a rule of meeting or exceeding expectations. So the key message is that we have and we will continue to do you see.
To do.
As we've done for the past three years.
Wonderful so there's no green is LNG, although we did win and site NEPC that as yet if I'd.
But what is becoming more evident as time passes is that the other areas of our businesses are outperforming.
As such this is becoming less important to achieving targets, even the upper range talk a little bit more but this lisa so onto slide seven and some key highlights so going across the tall overall revenue and EBITDA up nicely was consistent margins really showing a focus on winning the right work.
Strong execution.
The key point to highlight is that all three segments had double digit growth, what's a ton of course.
Schools throughout the year hot or above plan.
True business performance is of course, all about cash and I'm pleased to report a focus on cost management is paying off big time.
And I can version of 127% speaks for itself, but I can tell you that we are not perfect. We believe that are still opportunities as a process as mature to further improve gear. So.
I will talk a little bit more of a capital deployment flexibility.
A little Lisa.
No I know, it's all very nice to talk about 2019 or five the past 12 quarters, but what I'm well aware of what people are really on their money to do is talking about what we're going to do next year on beyond this in mind and to underpin a continued growth.
Mr. Bill 1.3 times for the year.
All segments above one is a key highlights, especially given the longevity and the quality of not backlog and the fact that does not include look on five Freeport LNG snow to slide it.
The quarter as you would expect is very much the same story as the a strong revenue and EBITDA growth well Cps growing a little bit foster due to some planned talks pick ups onto a little bit with the resolution of the private security model, which is really mainly a cash outside event as we head, but most of the revenue many years ago.
Backlog is in great shape.
And the standards for the quarter was technology solutions during an amazing job with a book to Bill 2.1 in Q4.
Well, it's a slide nine.
That's supposed to touch on the island government solutions.
We remain upbeat about the markets we are focused on.
It is a deep domain expertise plus on key strategic growth themes of defense modernization that human outperformance aligned well to the recently appropriated twentytwenty deal the budget on the proposed 21 budget.
The largest proposed increase we have seen in recent times to the NASA budget combined with our leading position in size and human space flight.
Exciting and also lines with a third key strategic growth theme of space exploration.
Internationally, our activity levels and pipeline remains robust.
So when you combine the above with a high level of secured work and a I'd like to point out a very low level of re competes in the next 12 months plus later in low cost five Lukas positive on well in line with a 2022 targets.
Well the energy side, let me first touch on technology solutions.
Many of our technologies lined up well with a cleaner future an aligned with the sustainability program.
The pick a few highlights we have a number of maturing and what are your opportunities a growing pipeline of creekside disruptive calculation technology opportunities, mostly in North America.
Locally rules technology prospects continue to look healthy.
When you combine this with a very strong level of work in Holland, given the Q4 bookings technology is very much on trying to meet this long term growth targets.
But we do expect a little bit of a slow start to the year given the events in China.
What's the slowing of the Chinese economy.
Well aware LNG spot prices other very little levels.
As such.
Hops exception of the iOS. She led projects, we expect the LNG F.I.D.'s will move to the right.
Mid term supply demand comes due cross so that market does remain attractive but in twentytwenty guidance factors in the current market softness.
On the broader energy markets chemicals margins have deteriorated and oil prices are also facing downward pressure really signaling a weaker topic cycle.
Fortunately for KBR, we have two things in our favor as we move into Twentytwenty. The first is that we have a strong backlog of recently announced on inflight projects, mostly cost reimbursable ramp up in Twentytwenty amounted to 21.
And secondly, we have a lot sustaining capital business, but typically sees increased activity via opex spending that's topics cycles done.
Such as targets set in May of last year remain intact. So.
So all up I've lived that means upbeat and mistakes as nicely on to slide 10.
As you can see I would expect opportunity pipeline remains significant.
And government solutions, we're seeing a number of larger opportunities across engineering space and more recently in the logistics city of both in the U.S. internationally.
Should be awarded in Twentytwenty.
I would be potentially disruptive.
The energy opportunities are significant and it made so.
We expect to watch, particularly in LNG.
To the right.
The histogram on the right has been updated into flinch the work secure to achieve 22 targets.
When it was 67% already in the shop and when you factor in the smaller shorter duration consultancy program management idea Q type worse. This number is a bit closer to 80%.
You'll recall that the lower end of a range included zito LNG and upper range scientists in just one LNG projects not only twentytwenty.
With the businesses performing you can see that acquired contributions a world from LNG has reduced other twentytwenty is quite small.
This really demonstrates the transformation at QB on away from otherwise so now Angie future projects truly other condos on the kids and built the key itself and on to slide 11.
We thought it would be worthwhile to show you the booking momentum and backlog goes to further reinforced I was saying or the previous line.
I really think the Tru measure of forward momentum, it's not simply a single good bookings quarter, but a demonstration of winning the right work that delivers to shareholder value over time.
This slide shows the consistent performance business development teams, but also demonstrates things simply focused on delivery you do know when continues profitable work unless you have a proven track record of making your customers successful.
I'll now hand over to Mark who will take you through the numbers in more detail cover capital allocation and of course guidance for 2020 month.
Great. Thank you Stuart I will take it up on slide 13, which summarizes the fiscal 2019 results.
Overall as you've heard from store the year progressed and concluded largely as expected.
Strong topline growth stable margins within our targeted ranges and other items like interest and taxes playing out.
As we guided.
First it's great to see how each of our segments contributed to growth during the year.
Its government solutions, providing the initial lift off in the first half.
Technology and energy, providing this lost in the second house.
As Stuart said worth repeating each segment generated double digit growth in the year and achieved its targeted margins.
The growth reflects winning mostly cost reimbursable low risk professional services across our G.S. and yes segments.
No risk high margin technology sales.
Yes segment.
We think this speaks well to our cost competitiveness the strength of our intellectual property and the effectiveness of our business development organizations.
Another aspect of the year, which manifested in business capture and predictable margins.
And is there just alluded to was project performance.
The performance translated to a high recompete and new business win rate.
Which reflects strong customer confidence in our ability to deliver.
Execution also enabled us to profitably complete a number of projects make this being one of them as in previous estimates.
No surprises along the way.
Interest expense was up from 2018, as we had expected on higher debt levels.
Recently taken action to reduce that meaningfully in 2020, which I'll cover here a bit.
As we guided throughout the year, we delivered some tax benefits in the fourth quarter, mostly comprised of R&D tax credits.
It's benefited the provision accordingly in 2019 animal translate to real cash savings in 2020.
Adjusted EPS for the year came in at $1.69, that's up 10% from the prior year.
Reflecting a combination of revenue growth.
In margins and tax benefits, partially offset by lower equity earnings from our joint ventures.
Higher interest.
Operating cash flow is just over 250 million.
Up almost 100 million from 2018, reflecting an operating cash flow to net income conversion rate of 127%.
Particularly strong, giving a double digit top line growth rate.
This primarily reflected or greater focus on working capital management as we said we would do.
There were just dsos by four days year over year and continue to operate at a net negative working capital at the enterprise level.
In addition, as Stuart mentioned, we did get a nice bump in Q4.
Final settlement and payment of the private security matter with the U.S. government.
Which was the primary driver for topping our guidance for the year.
Cash flow is truly a team sport, we really believe that here and this is progress reflects good work by many folks across KBR.
With solid organic growth profitability and cash flow, we improved our return on invested capital by about a percent.
Given the year and ended at 9%.
Really good progress towards our goal of 12% by 2022.
Now I'll move on slide 14, and start to cover a free operating segments on a little bit more detail.
First stuff government solutions had another fantastic year, with 14% revenue growth, 9%, which was organic.
Adjusted EBITDA margins over 10%.
And contributed handsomely to our cash flow performance.
The segment had a big Recompete here in 2019.
Finished with a near perfect track record at 98% clearly an industry leading statistics.
Big wins on Logcap side in the Marine courts, Prepositioned stock program plus option extensions for the NASA.
Jonathan station or integrated mission operations program and also the critical mission systems program all contributed to good earnings visibility for years to come.
In addition, G.S. already won its largest 2020, we compete with the NASA Ames contract Award announced earlier this month.
In this program are performing cutting edge research and development alongside our colleagues at NASA and the areas artificial intelligence knowledge discovery.
And the technology information processing and more.
With this important went on a recompete risk for the rest of 2020 is quite low.
Book to Bill for G.S., excluding P. advice as we've consistently reported was 1.1 for 29 team.
And I said earlier this is not yet include any value attributed to Logcap five.
As it has not completely come through the protest process.
The new business pipeline remains well over 10 times annual revenue.
Margins were also strong across the board with solid project execution and highly valued competitive solutions for customers.
Onto technology Slide 15.
Another strong year with organic growth at 26% and margins also at 26%.
Revenues in 2019 were balanced across technology offerings, and olefins ammonia and refining.
Fairly balanced mix across license proprietary equipment engineering and catalyst categories.
The tech team did finish the year with an exceptional bookings quarter in the fourth quarter Stuart mentioned that earlier, a book to Bill that two times certainly provides good momentum as we enter 2020.
Now, let energy solutions slide 16.
2019 was certainly an important year transition where topline growth was restored and our service offerings. In this segment continued to gain scale and geographical expansion.
This segment produced 16% organic growth during the year.
Also produced double digit sequential growth the last three quarters in a row.
The balance sales at cost engineering feasibility early stage contracts project management Reimbursable, He Tc maintenance in operation support and consulting engagements.
There are no lump sum EGPC contracts in our portfolio today.
Which yields and lower risk more predictable profitable and cash generative business profile.
Book to Bill is just shy at two times for the year, which excludes as Stuart said earlier any value attributable to their Freeport LNG you can see opportunity.
In sum, we saw strong and balanced performance across all three segments. This year with particular success in protecting the base and winning new work.
These attributes bode well to continuing to perform in accordance with our long term targets.
Onto slide 17, summarizing our capital structure and deployment priorities.
More good news here.
We set out to achieve meaningful de leveraging and 2019 and we exceeded our goal.
It's long EBITDA growth, coupled with debt reductions bought our gross leverage ratio down to 2.7.
Your end.
Well 1.2 actually net.
With it just funding done strong free cash flow drill cash balances higher at year end, which amplified the net leverage ratio reduction.
We were pleased to recently announced the successful refinancing in amendment of our credit agreement and important element in our long term capital deployment strategy.
Consistent project execution strong EBITDA growth predictable cash generation and improved credit ratings allowed us to tap into the debt markets in January February. This this year.
And we're certainly pleased with the outcome.
In connection with the refinancing we used excess cash to reduced borrowings by about 130 million.
Not really helped ensure a successful execution of this transaction.
The refinancing provides significantly improved credit terms that will benefit KBR for many years to come.
Increasing our capital flexibility, reducing our borrowing rate by a full percentage point.
And extending the tenor like two years.
The facilities now expire over 2025 and 2027.
We're also pleased to announce a 25% increase in our quarterly dividend.
Enabled by the capital flexibility allowed under our amended financing agreement.
The dividend increase reflects successful transformation of KBR into a predictable stable generator or earnings and deployable free cash flow.
And puts our net income dividend payout ratio at about 25%.
Yes.
Our board has also recently at Who's a replenishment of our share repurchase authorization to the 350 million dollar level that we established some time ago.
We do not intend to commit to a signal plan to buybacks, which we may undertake absent eminent M&A or other reasons.
We accordingly have not factored in to be purchases relative to 2020 guidance.
Speaking of guidance I'll move now to slide 18, which summarizes our initial die for 2020.
The first point to make relative to what forward expectations is that we affirmed the long term targets announced in the May 2019 Investor Conference.
Those targets as a reminder, or to achieve a compounded annual growth of 10% to 14% topline.
14% to 18% adjusted EPS.
Both over the 2019 to 2022 period.
We also are targeting adjusted operating cash flow conversion of 90% to 110% of net income over this same period.
And as I said earlier.
Turning on invested capital metric of 12% like 2022.
Just a quick word on adjusted cash flow since this is a new term.
We laid out and when they come with friends are operating cash flow targets will be adjusted to exclude the benefit.
Cash flow receipts that would be reported from large project advances.
And also the reduction of reported in cash outflow for the burn off of such advances.
Both the receipt and burn off other dances do not really affect deployable free cash flow.
We want to focus and want you to focus on the cash flows out is truly deployable for obvious reasons.
If you didn't more color on this don't hesitate to call Alison who cannot walk you through but just to mention which we think it's important to understand.
Well the execution things are they just being complete the legal cost settlements and ultimate recoveries will take their course and dollar of course challenging to predict relative to timing.
To improve visibility of our core business performance, we will ring fence and net effects of legal costs, adjudications and settlements on excess whether they're gains or losses.
Exclude them from our guidance yes.
Similarly, our cash flow estimates do not include any effect from the substantial recoveries, we ultimately expect to receive.
As the arbitration settlement processes all are eventually completed.
So those clarifications, we believe our 2019 results are excellent start toward achieving these long term goals.
We also a phone they're not dependent upon winning or executing any lump sum he PC work.
And we'll however, opportunistically engaged in those types of projects only if terms conditions and pricing meet our risk reward criteria. As this team has consistently demonstrated for some time.
The 2020, we are guiding adjusted earnings per share.
$1.80 to $1.92.
At the midpoint represents a 10% growth rate above $1.69 achieved in 2019.
That's the timing, we expect roughly 40% of earnings in the first half of 2020.
60% in the second half.
Other than the possible booking of log cabin five we expect late booking activity in Q1, given the strong finish we just pulled off in 2019.
Adjusted operating cash flow guidance for 2020 is set at 200 million to 250 million.
With that takes a little longer this time of year, but thanks for sticking with me for that that to steward for his final remarks.
Thanks, Mark and I'll take you to slide 19 on growth in volume. So I'll leave you with some key somebody take away. So starting at 12 o'clock from an yesteryear sustainability perspective, we believe KBR is differentiated and we are leaning forward as we progress of sustainability agenda.
20 and beyond.
We're well placed very well placed in our chosen markets, we have little concentration risk on a backlog is attractive and its duration on this commercial profile.
This underpins the delivery of sustainable growth and achieving 2022 targets.
The cost conversion profile of our book of business is delivering excellent results that will continue to generate strong free cash flow, which of course leads to greater capital deployment flexibility.
In summary.
His mind, although I will close by saying is indeed, a great kind to be part KBR.
Thank you and I'll now hand, the call back to the operator, who opened up for questions.
Thank you the question and answer session will be conducted electronically to ask a question. Please press star one on your telephone keypad.
If you already speakerphone. Please make sure your mute function, it's turned off to allow the signal to retire equipment.
Thank you limit yourself to one question and one follow up to allow everyone an opportunity to ask a question well pause for just a moment to assemble the queue.
Our first question will come from Sean Eastman with Keybanc capital markets.
This is out counter Sean.
I just wanted to touch on the energy solutions margins, which came in below expectation I'm. Just wondering if you could probably provide more color on the quarter and where you expected to trend throughout 2020 relative to the mid single digit guide given the Investor day.
Yeah sites.
In terms of going forward, we our expectation is to be within guidance and tells a mid single digit so no change there whatsoever.
Turning to the fourth quarter. Alex This is mark eat we are wrapping up on some new projects are being conservative in our bookings positions there.
And in addition to that.
We have one.
Program that we are exiting that we've disclosed before in the Americas region that did have some excess costs associated with it that the margins a little bit in the fourth quarter, but that should be done.
Very helpful.
And then we were encouraged with the log cabin news earlier this month with the transition date set for March 2nd.
I'm just wondering since the date to file appeal. This past is there any update on that and that's true transition time period for the expected her on six months for September timeframe.
Yes, I mean, no no real update on on the appeals process they'll have to as you have not come into the award gets the court will come through the end of February and there will be a small window for for for others to appeal between that and I guess the second to March after that.
<unk> pretty quickly you would think <unk>.
Yeah I'm it could also choose whether there's appeal or not just to progressed through the transition or in terms of the transition of south or again, you know a guy has been quite conservative because it's unclear as to yet as to why these tasco others will come through and what the transition would look like having the expectation is that.
It is that perhaps a little bit easier to transition I mean, you called being an obvious one considering that income, but there will move a little bit quicker, maybe north called moved a little bit quicker and maybe it'll be phased in Iraq, and Afghanistan, but in truth.
And that's why we guide is conservative we do it no.
And as we as we signed up more we'll give you more color.
Our next question will come from Jamie Cook with credit Suisse.
Hi, Good morning, I guess at first question on the flip side had markets that government marketing solutions margins came in a little better than expectations and I think mark that I'm pretty nice high for you guys relative to history. So wondering if there's anything in there and you know if we can look at fourth quarter is it sorry.
Yeah, Hi, higher run rate, it's as we move forward given the Nexsan portfolio. There and then my second question I'm just relates to educate on any update on the arbitration timing and I have any resolution.
And then my last question I guess, if we back out Freeport or Logcap, how should we think about your bucket out for 2020 or your ability to grow backlog. Thanks.
Hi, Jamie Mark here as the government solutions margins are expected to be in their targets for 2020.
Upper single digits, and you know all the reasons for that background, we get at a healthy spike in the fourth quarter, primarily from the private security.
Payment that we received in the fourth quarter, we had a receivable position for a chunk of it but we had not accrued for the interest which came in in a a low double digit number to the income side. So that was a nice benefit to receive in part and the TNL.
And with some really great clarity.
Cash collection, there was just about 50 million I said that amped up the fourth quarter total test slow it's not recurring but it's in the bank and as Dan or will they use and our deployment strategy. So we're certainly pleased to have that wrapped up in our favor yeah.
I think with excess the you know the application on the power station will proceed to this year, we still expecting judgment <unk> later this year Gary.
But there's no guarantee intensive how long the courts get to decide but without is still the expectation and no expectation from from previous quarters has not changed.
And yeah, that's probably all I can say or not at the moment.
And then in terms of book to Bill going into into 2020.
I mean, I think our pipeline is very robust and as I said, we're seeing significant activity and bidding activity, particularly in the and the government solutions side of the business and you know, we expect book to bill to to grow nicely skew the through the course of the year.
Energy side of the of the highest Ah Ah I think bookings will be under pressure and you know I do think that will do reasonably well given the mix of business that we discussed in terms of the the opex in the sustaining capital piece of our business, but I think that there will be a slow down a bit Greenfield awards, but I think at the same time, though there will be movement.
Certain markets are.
Depending on the viability of those developments, but but you know it's difficult to assess what those bookings will be through the year, but again, considering we're coming from a reasonably low base. The oldest about that I think we'll do pretty well in a book to bill basis.
Well go next to Steven Fisher way PBS.
Thanks, Good morning.
Mark on the a that 2020 cash flow guidance can you help us with some of the reconciling items between earnings and cash flow I was just maybe a little bit surprised with the earnings being up.
10% in cash flow being down at the end point and I guess, if you back out that 50 million.
The receivable collection, you know maybe it would've been flat, so I guess earnings up, but Ah cash flow kind of flat.
[noise] seats. So you take out the $50 million of cash collection. We would have finished just a hair above 200 for fiscal 2019, the big points to 25. So there's some nice growth there from 19 to 20 on an apples to apples basis.
Relative to the reconciliation.
You've got quite a bit of from some net income that is you've got quite a bit of depreciation and amortization, but we also have the pension obligation of roughly 50 million that as a some traction to that.
All the rest is tightening up working capital so in an ongoing.
Growing business.
We do expect to have some investment if you will in receivables, but we are working very hard as Stuart said in his prepared remarks, India, So reduction and hopefully we can offset that.
And those are the main items, nobody I think there as to the customer it's rather than a guide.
Right about 100%.
Okay. That's helpful.
And it sounds like you guys had been pretty cautious with what you have included an assumed in the guidance I just I guess I'm curious what are the most important thing that's still need to happen that haven't yet happened in order to to hit the guidance that you have out there.
But I I think we've got to continue to execute well that's again, but I think we have to no go ahead of the skis on cost and not so given.
But ultimately Steve we've taken a reason they predict position on on on the and the government side, both because look out five on taught us a it's as you know we've moved LNG <unk> essentially was really making that a little Ah Ah dollars, there and in the and all those night.
Saudi and all of two I'd say, so I think ultimately that de risks that elevated so I think that I think really for us going in with all of US you know sort of 70% work secured if they're all around execution and making sure that we you know that we deliver on the margins. The other no guidance and if we do that.
And with a with a little bit of success on the on on the programs that were chasing.
You know, we should do we should do well and twentytwenty.
Well go next to Michael Dudas with vertical research.
Hi, good morning get on what else.
[laughter] voice to where it gets you every penny Tonight. So first.
Interested in I think in your prepared remarks look as opposed to be opportunities.
And your pipeline you talked about international logistics wanting to see outside of UK work you know some of the opportunity some government side internationally that could maybe help not only from your embedded work you know actually government side most of your national energy.
That's very very global that's my first question for instance.
Okay. So in my prepared remarks, I say talks about lots programs that were looking out and engineering science and space on more recently in logistics or over the Buffalo kind of five lots in both.
Yes.
On outside the U.S. and I mean, these are substantial programs that we named by name the moment.
I will not do so Ah, but the you know there in the billions of dollars and ER and as I said, the if they come through and we expect in 2020 or I mean, they would be that would be highly you know.
Disruptive [laughter].
Hi, this is going into to the end of 2020 and into 21, so quite an exciting time chasing those programs and I think ultimately where where they say stone company in a I read out and you know we stand as good a chances anymore that being successful. So I think not so that's been a big move in towns as our opportunity.
Line coming through in the in the last couple of quarters.
It's not start to mature, they're getting broader more excited about it.
I think it sounds like the energy business, Yeah, sorry, well just continue that if you don't mind Oh, the energy side. You know we're you know we are very heavily focused in key areas you know the middle East a it's got a lot of activity.
Regardless of what we're saying in terms of pressure.
Not continues to be a sort of a a whole bunch of opportunity and again, we're very well positioned and in a in Saudi for ongoing what kind of Q weights are seem quite a lot of.
Activity, there and into a month or but they're not side of the you know a very well positioned in places like Azerbaijan that they continue to invest in near future and ER, regardless of the downward pressure on oil they're looking at our long term view for the economy and I think there, but again very well positioned to take to take advantage of Ah.
Long standing position in that country and commitment to two building capability in a nickel content within the then as it was in until I didn't suddenly in Saudi until I think that ultimately it's about choosing your fights, it's about picking where you're going to spend your your EBIT dollars and I think if you do that wisely as I said that LNG.
He asked the question you know, we can do well in a difficult energy market, particularly given where we offered also I'm coming off that base that we're on.
Yeah, no need to cool to rush that for sure and some of those opportunities you think that we would see some visibility news second half the fourth quarter of the shoes that that could the <unk> recently announced or sports contracts.
Yes for sure.
Definitely coming into the quarter and again in the fourth quarter and some of these programs so definitely through the course of Twentytwenty.
Well go next to Jerry rabbits with Goldman Sachs.
Hi, good morning, everyone.
Oh It was just don't I'm wondering I'm sorry.
Hi, guys there.
Can you expand on your prepared remarks in terms of opportunities for you folks from rising participation for speaks investment.
Do you have a sense for what the pipeline might look like on a multiyear basis any.
Long term planning that's been shared with you that you can talk about in terms of the opportunity except for <unk> for KBR is the result of space coming up though.
Prioritization scale.
Yeah No. Good question I'd, just remind a major that as I said I think last last quarter. It was interesting the as we progress through the year. The Dalai part of the year logistics. This was the driving growth and it was engineering and a loss at part of the yet it was actually signed since space. So what's that.
See I don't ticket activity and award in the space sector already we did announce that we had won a lot just re compete as the year at a innocent Ames, so again not be as well for the future.
You know, we were very well positioned in opposite Nasr, particularly in the elements of human space like if you can think about where the investment is going and what the political priorities are not that's really to get to get a you know people back to the mood and then or what's the bars. So they ought to this program initially.
With that was a significant increase in nasas budget, the largest I'd certainly I've been a whales in recent times, you know and the focus very much being on human space flight.
You know, there's a number of things that coming through that we're feeling very excited about it's actually it's difficult to sort of put your finger exactly on one program. It comes through multifaceted and we've got a number of existing contract vehicles that allow us to grow without actually having said that and so that.
So that's what that's why we're excited about it or was actually got some new programs and Ah Hey, there were tendering neither have had already tender last year and still waiting for for award and enough and ER and you know real will start to see them come through in a in 2020 as well so well.
Lots of activity there across engineering across I guess, several human space flight piece and support lots of us.
And how should we think about the when bat ultimately translates into incremental sales for for you folks. So it sounds like we're expecting a work the comment 20, and then potentially their revenue accelerating into 21 and as a result was that it was I point to think about it so take the budget plus one essential.
<unk> for the might actually be spoke on these programs and time, so the opportunity so forgive me.
Yeah, I mean, there I think the but you're still needs to get approved.
But I do think this strong supports it to do so and a bill but you never know, what's an infection yourself, so, but but I think directionally I think though is the way to think about it assuming that budget does go forward. You know you think that we would we would sort of grow incrementally I want to like this that the increase in the budgets I mean, that's typically how it goes and it'll be.
Done a little bit better than in recent times are growing I say foster.
The budget increases as we that's because I think we're actually focused and ideas for the spend is actually larger than the overall budget increase.
It appears to be consistent with where the money is being spent into the future.
Well go next to Tobey Sommer Suntrust.
Thank you well wanted to ask a question about the government solutions business in the margins, which were up nicely in the quarter. What is the margin profile up the pipeline and the bid activity and is there any material change and sort of a contract type mix that.
I would inform us about the margin trajectory going forward.
Yeah. So we don't know it'll have been very consistent on a margin guidance you know what's its upper single digits not some mix of what we're doing internationally on and with the department of defense I'm not so for that matter all blended.
And we expect not profile to the main consistent not that sort of supports our long range targets, which again we reaffirmed.
Do you have a perspective on the budget that appropriations for this year or whether whether we'll have one got a time or continuing to see our past the election.
So.
I think we've had.
The last 12 years, you've got a CR and 11 of them I think is the is the statistics so.
We were getting used to that and we need to plan for that to recur again Oh.
I don't think we're smart enough to say, whether or not the election helps or hurts that.
But.
We'll be hopeful other timely budget, but if it doesn't happen will navigate through the year, mostly done off into the past.
What's important because I think we said a few times is there is.
Bipartisan support for a strong defense spending.
The request in the President's budget submission is up modestly for defense, it's up a lot for NASA as Stuart said and we're confident a good chunk of that we'll get through a ultimately even in the election years. Just a question that when it gets turned on and the budgeting process and you know if the past informs the future.
Sure, it's probably the CR and that goes into December and January and then we get going.
Well go next to Michael Feniger with Bank of America.
Hey, guys and thanks for taking my questions, just where nearly two months in to the new year and you kind of mentioned yeah. The krona virus I'm just curious it sounds like you incorporate into your thinking for 420 20, hoping you can kind of flush that out at least where exactly are you thinking that the hit.
If there if the impact of you're seeing already to maybe slower start in Q1 bookings or on the revenue side with you pay some tougher comps maybe I I'm curious how you guys are incorporating that type of of risk right now onto your 2020 thought process.
Yeah. So that's the main activity for us in China in terms of direct activity as it relates to technology business, but we had stuff such a strong bookings quarter in Q4.
On a lot of a a activities I said a is also in North America, where they need to disruptive technologies, that's changed the I guess, the geographical mix a little and nothing.
Business.
You know, what where and what not insulated but were more insulators everywhere. We do think that you know the bookings and technology as I said will be a little but a slower in the first quarter.
As a result of that and I'd, even sort of progressing the what this ongoing there's gotta be impacted us just to find.
And so that's why we said.
We'll have a I guess.
We expect that to catch up that started at a 40 60 split plus cost second off a in terms of that the rest of the business as I said I think for the rest of our energy business. The work that we haven't it's like projects keep is somewhat insulated from the I guess that downward pressure on on the LNG price and things like that so it was fairly good shape.
There and then I think the effect on the on that on the government side as a base.
That is not really there toll and.
I think the other thing to to keep in mind is that we are going in with 70% seven zero of work secured.
And finally, the small stuff that we don't know about so 70% ever working on going into this year. I think we were 60 mid sixtys last year, so a little bit more of a conservative position given some of the volatility in the world.
But I think it's a you know were pretty good shape and I'm pretty confident of achieving a double digit growth.
That's helpful and just the dividend increase you guys announced just in context of how we should be thinking about M&A. There. There was a big I set out there seems like the company took a very disciplined approach. So how should we view the announcement today with the dividend share repurchases.
In context of the M&A pipeline is is there anything tranche for a minute out. There is are you guys kind of moving away from possibly those type of they transformative deals yeah really focusing on what you guys have now with your platform.
And ability to compete if somebody's bigger projects in government.
Yeah. So so you're quite right. We've got we've got a very healthy pipeline.
He's got double digit organic growth.
So we don't have to rushed to the finishing line and and overpay a good deal fever. As you say, we're very disciplined approach tens of the way to think about the dividend in the and the share purchase authorization I think you should be really excited about it I think it's a it's you know it's a clear signal it up at least what the future, it's a clear signal or the cost generating.
Qualities of the business and and you know I think at a devastating confidence and tomorrow.
But it's a but it doesn't just the stock from our opportunity pipeline and M&A either.
You know, we've always said that you know if we can find like strategic and accretive M&A, a that really sort of moved the needle that takes us into new areas or your customer sat screw up the value chain or they looked at that very very seriously, but we weren't overpaid, we won't get sucked into that that said death spiral.
You know where where it was a clear about what we want a very clear that we're not we're not going to we're not going to like are you still are a [laughter] our desire to get me I'd, rather wait with common sense and.
So far I think weve devastated that you're quite right. We had a lot, but a lot of discipline around the Louis assets and you know we clearly have we felt that that thought process was.
<unk> as it was less not able to another son or.
Well go to continue that way, but does there's quite a lot of activity today and into M&A space, you're seeing a lot of deals are nice, particularly in the government solutions Arena and you know if we could identify something there that keeps us within sensible leverage ratio, the strategic and ER and and and we can get it for for somebody in a way that's accretive.
Then the Atwood suddenly go off so I don't think you should be the taking the dividend or the share repurchase authorization as a signal that we're not doing M&A you should tick as a signal that we're very confident about the cost generating qualities of the business and we've always said a feature and the target the low range targets included the deployment of civil Dotcom.
Yeah.
Thank you, but this one but the 22 when it does not so yeah, yeah, they sit down.
Capital, we've already deployed for the refinancing I mentioned earlier other than that which we've begun to lower interest expense going forward, we still have some excess cash.
After that transaction, we will generate more during the year like an important take away is how that cash is deployed as all upside relative to our performance and the flexibility as we have about deployment has been extended through the amendment I discussed earlier.
Well go next to Brent Thielman with D.A. Davidson.
Great. Thanks, I think but the question been asked but maybe mark just to clarify into guidance. It sounds like you factored in sort of a flat run rate of contribution from Bobcat five this year and I get more clarity is that right.
We have been conservative we had a slight uptick but it is a conservative number can think particularly compared to some of the data that's out there from 18.
Sorry, 1918 17 on.
Contractor activities in those areas, but due to the uncertainty in timing due to the transition period, we have been very conservative and the activity levels and the timing of taking over that larger scope.
Given given we just don't not perfect clarity from the customer and the court on one that will occur.
Okay, and then they cost that you are getting out associated with addicted to crack that creep higher in 2020 relative to what yet you hadn't 29 can what's driving that and how should we think about the cadence of that through the year.
Good question, Brent So has so that number is.
Exact same amount that we put in the 19 adjustments for the incremental interest between 18 and 19, So we wanted to.
Flatline, if you will the you TNL effect from 18, and not have that be a headwind or tailwind in though teams. So equalized 18, and 19 without adjustment last year, which was about.
Six cents I think.
But the other half of this year is the legal costs that we will be incurring.
To pursue or arbitration and other geolocation processes associated with both the client and the parties that were our previous subcontractors. So its 50 50.
[noise] incremental interest from 18 to 19 repeated again, it's funny because the.
The depths still there from those investments if you will and then the other half being legal costs to hopefully bring home our recoveries uterine 20 or beyond.
It does I mean, the recoveries potential recoveries are substantial and certainly worth the investment and legal fees to do well there.
Also if we you know free to do well in the recoveries will just not as while it may not be a good cash infusion to the business and I'm sure. We'll get lost so help us what to do without cost, but but in terms of the P.L. impact I mean, any upside or downside, but any upside as well will be adjusted so you can see the true underlying performance of the businesses there's no.
They will take about this will try to be clear as possible that but you know if we don't know the quantum nor the timing. So it doesn't really affect the true underlying performance of the business and as they start to recover over say that will offset more than offset any investment in legal fees.
Okay. Thank you.
Well go next step out I'm, calling out with Cowen.
[noise] <unk>.
Hey.
So had a couple of questions first hi, how are you guys are and I was a first question I had was mark maybe could you quantify what the adjusted tax rate was in the fourth quarter.
Because it looked like it was six cents of the.
Of the earnings, but I don't know if that's an accurate number because we don't have the yen.
The adjusted tax rate pull that up I can tell you. The the full year was 22% I was just a tad below what we had expected at 20 324, we ran higher than that during the year, but we were very clear we expected. These benefits to come in we are working on the R&D tax credit all year and.
And that up in the fourth quarter.
So that is a discrete item.
As a you know important benefits to the company, including cash will bring in next year.
Terms of the effective rate in the fourth.
That was pretty much zero.
Some of faces a fan out and they said there's a there's a credit of one one and horizons in the fourth quarter. So call. It zero, Okay fair enough. So it is as having computers and then why doesn't rise from you know the 25 to 27, Max and 2020 from what you had anticipated this here to be the prior.
To be which was 23 to 25.
Can you something about the main reason as <unk>.
Yep.
Got to be cautious in jurisdictional mix and so that's why there's a range there.
But the main reason why there is you know after the R&D tax credit and uptick in the right is the effects of the tax Reform Act of 2017 or phase in elements of that legislation that are mostly around.
Making certain forms of compensation not deductible and so that creates and on a per year basis and there was some headwinds there in 2020.
I am I going to be a modest a piece after that and 2021 and then it should stabilize I will point out that we are fortunately not subject to nice erosion tax otherwise called beat so we navigate around that so that's not hitting us, but it is that modest creep and hope.
We will see jurisdictional benefits over the course of you no longer term that will work that rate down almost certainly working hard on that.
Okay, and then within the.
Good pipeline you know it looks like on the government side. It went up quite a bit from Q3 to Q4 and I'm just curious to know reconciling that with your comments about Q1 being a bit softer in terms of book insert should we anticipate that is it's really Q2 in Q3 weighted or just a finer point I'm just based on.
What sort of outstanding and what the adjudication timelines or have your customers.
What what do you kind of yeah, I think I think that's like a.
Typically there's a rough isn't there in Q3 before the yes, [laughter], what's really going to get or do you use older budgets up but they are acutely I'd be weighted heavily in Q2 Q3.
With exception of low cap five of course of low caught five comes through as you know and gets.
So the they've moved forward with the transition little we'll know more about the task orders and those will get but.
Obviously in Q work.
Got it but that's not in a 9 billion dollar figure, presumably right that's ex Logcap peladeau going on.
Right. Thanks World Cup, yet and just to frame that 9 billion given it's a low recompete. Your this year and next year I presume that the vast majority of that is for new business.
Right, Yes, you are and you know so as they really sort of.
Underpins incremental or Gotta girls on it. So again, that's why we're very excited about the future I think we're with a low recompete rate or you know should go execution performance and and ER and the fact that weve, but we I think we've got fantastic business development folks and I really do you think that we'll we'll do well going in.
To a into 2020 and be owed.
And then one last one on that so it shows 110 pursuits over 100 million and I presume that speaking to the.
To the and most of the pipeline so position University approval et cetera, but are there any hey, I'm going to go.
Yes are there any needle moving individual contracts are pursuing any 500 million dollar plus type arrangements and then lastly.
The Tyndall headwind that we've talked about either 150 million in 2019, that's nonrecurring what are the offsets that you might have.
Grow on top of that.
Yeah, so that automated.
Again, so so today touch your question on a significant for since the onset to that question, yes, we have oh.
Oh.
I don't know over a dozen I would say across the businesses are over 500 million.
Okay or more.
So I think we're feeling again in pretty good about that.
And in terms of the Tyndall headwind, you're quite right I mean, our or a top line growth as you know still still goods.
Yes, and positive extendable and.
Sorry, including tend to onex tend to you know very much somebody with a long range targets in terms of all sets you know what's it's interesting you know as part of the North called award. We we do all the disaster relief work for the Army.
So we don't know about not today and and Oh, It's you know, but there maybe opportunities associated with was with disaster relief going forwards and no no just this year, but the cutting for the remainder of local <unk> five.
So we feel again, we don't know about those but it could be still offsets to add to that.
Yeah, it's very helpful. Other than the other than the opportunities in the pipeline that we discussed I think you know there's clearly some upside on logcap overall as you undertake the new skills and and this is for the past performance of other contractors anywhere close to.
To that going forward that would be positive relative to what they said.
Our guidance on this year.
Thank you very much good.
Yeah, well go next to Chad Dillard with Deutsche Bank.
Hi, good morning.
Well Arctic blast.
Sorry, just one question and there's actually percents Terawatt energy solutions operations and maintenance business just been hearing about not just some maintenance activities and push right all that I'm just curious whether if you're if you're seeing that.
And does that potentially mean earnings contribution from several things a little bit more backend loaded for the year I've ever just like more broadly well how much of a profit contributor I wasn't talking to them and how you think about that but those are the whole poor for 2020.
Yeah, I think in my prepared remarks, Tom We Ah you know were quite clear that the sustaining capital piece of the business was about half of what's our of our EBITDA on energy solutions.
You know, we expect to continue or.
We're not seeing any slippage.
That's what we're chasing on the maintenance side and Oh that activity levels are they.
So we're feeling I gained quite good about nine times about chosen markets.
No what are your healy hearing about maintenance activity something to the right, but certainly we've really likes theater, saying that and again I think the beauty of they'll sustaining capital programs as the underpin typically with ER with this low longtime contracts I think as you've heard me say publicly the our average relationships in the latest fulfilled.
It was 14 years.
So I'm very very akin to I guess government contracts to really build cost plus load of time relationship based and are you know once you establish yourself reasonably are reasonably good for the cost perspective, not quite as good as downward but good. So so yeah, we're feeling pretty good about that.
One thing is weighted one way or the other because of the the nature of the contracts and a great.
I think part of the question Mike related at Brown, really that's a subset or a part of our own business or anywhere else and a that performed as expected and 2019.
Equity and earnings there were some other offsets and equity in earnings that we've talked about during the year that haven't early or that distorts out a little bit but in terms of its contribution by itself Goodyear and a pretty steady into 2020.
[music].
Great. Thank you very much the bulk of it.
Well take our final question from Andrew Kaplowitz the city.
Hi, This is I immediately on for a handicap once I think some steady mean I just had about one question and I, yes segments Arlington somebody you already talked about in the projects me a.
Push push outs right, but can you just talk a little bit about the terms and conditions. The projects any do you expect to see any improvements in 2020.
Yeah. That's a that's the has to be abolished onset I'm afraid I think you know as far as we're heading through 19 separately the competitive environment and LNG was because changing in the favor of getting better more sensible times I think that position still retains today.
Right, but you know we said it before in a as the market gets softer kind behavior changes and ER and you know maybe some of that competitors, if there's something silly or they've done it and the cost of the hopefully they will do in the future and but but that's what happens and people will take advantage of that so I think today, it's still a very attractive.
Environment, but if I think that's the salt the self this continues for a long time and and people get getting desperate we will not a bit of people get desperate perhaps not done done on a go chase at once so again, it's a it's a bit of a bounce beauty, but this is on us as I can be.
Okay got it picks.
[laughter] just like to turn the conference back to sort of waiting for closing remarks.
Okay, So they're close.
2019 was that it was a great year for KBR and I'm really and 2020 I think we're very well positioned for continued double digit growth and of course associated scroll cost generation.
I think the dividend up 25% and we talked about this on the call is a clear indication of a confidence in a low town sustainable growth on performance.
And not just like two to two close by saying you know, we retain and remain confident about delivering 2022 targets. We very much on track to do so I think a you know weve performed onset above expectation. We said is done and said what we're going to do and then delivered against it and that's.
Certainly our or I wrote yourself around it going forward. So I think this is all underpinned by a finger in the error I wish it's actually underpinned by actually very strong level of working hard.
On the quality of earnings and the associated cost little without working on its very very attractive and that gives confidence to just done behind those targets. So was that a little closer to say. Thank you again for your interesting KBR and for joining US. This morning. Thank you.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
Oh, okay.
[noise] Oh.
[noise].