Q2 2020 KBR Inc Earnings Call
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Good day, and welcome to K, B or incorporated second quarter Twentytwenty earnings Conference call.
This call is being recorded.
As a reminder, your lines will be in listen only mode for the duration of this call.
Would it be a question and answer session immediately following prepared remarks.
You will receive instructions at that time.
For opening remarks, and introductions I like to turn the call overtime I listen to discuss.
VP of Investor Relations. Please go ahead.
Thank you Brian Good morning, Thank you for attending KBR second quarter 2020 earnings call.
Joining us today or do you look Brady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer.
Jordan Mark will provide an organizational update just got highlights from the quarter and presents our updated guidance.
After these remarks, we will open the call for questions.
Todays earnings presentation is available on the Investor 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 them and their potential impact on performance as outlined on slide two.
These matters involve risks and uncertainties that could impact operation and financial results and cause our actual results could differ significantly from our forward looking statement.
These risks are discussing our most recent form 10-K available on our website I.
I will now turn the call over just do it.
Thank you Allison good morning, Thank you very much for joining us today.
Got a few topics to discuss but I didn't want to start with the sustainability movement as we always do so if you turn to slide for this is our sustainability plot for a you've all seen this before under our zero harm encouraged to care philosophy, you can see the environmental and social pillars that make up not plot.
For.
So if you turn to slide five.
You've heard me say many times are settling for them once the secret sauce that KBR is our high performing culture and a very important element of that culture focuses on social mobility.
Social mobility brings three of our sustainability pillars together as you can see on the slide.
As a company that operates in many many different countries and employs a very very diverse workforce.
I feel it is essential that we ensure that is equal opportunity and that we create an environment that encourages on facilitates individuals to succeed.
We're also committed to working and getting back into communities, where we operate.
And our sustainability report, we highlight a number of these I'm not showing a couple here to give you a bit of a flavor of the great work people do.
I would like to take this opportunity to steinke our people publicly.
These are the people who give up their time and the lender experience, a et cetera, and it's a fantastic piece of a culture and one we at KBR can all be very proud off.
Now onto slide six.
Some key takeaways for the quarter. So another quarter of solid operational performance with adjusted S inline with expectation and a notch above consensus.
All of our businesses performed at or above expectation, but the real highlight of the quarter was of course, the very very strong cost performance.
And this has led us to raise.
Cost guidance and Mark will cover Dot later.
Our business continues to prove extremely resilient.
On a strong bookings in the quarter underpin future resilience.
As promised we have also concluded our portfolio review and in line with a strategy to move further up market.
Not future structure will consist of two segments government solutions on technology solutions.
This shift really simplifies our business.
Had a moves away from more commoditized cyclical and volatile services on markets, obviously more on this later.
As outlined in a press release, where I'm pleased to advise the D.O.J. That's close that's you know oil investigations with regard to KBR and they actually have full has notified us that it is no longer focused on KBR with regard to you know oil and we've just also had the S. C. C is closing.
It's a its investigation into KBR as it relates to you know oil so real positive outcome and one that reaffirms the that KBR as a company of integrity.
And it has a world class compliance program.
You're all aware, we set a number of years a goal to resolve we had a number of legacy issues.
The team inherited and the result, many of these and this is another milestone.
So let's move on to slide seven.
Mark will give you more detail on the segment performance, but at a group level. Our overall results were very much in line or.
Our above our expectations.
In terms of year over year comparisons revenue is a little all last year that so you can compared to last year.
This.
Reflected reduced contingency logistics and government, primarily relating to tyndall that you're well aware off a lower volume, but higher margin mix intact.
Offset by increases on lower margin energy projects.
Overall, the effect from coal, but was not significant.
We've got to give a lot of credits or employees and and of course to customers for that.
Margins were very strong and government undone tech and the absolute and year over year.
Energy was modestly profitable consistent with our messaging outlined last quarter with margins a step down from last year's result, which was boosted by favorable project close outs.
And this difference pretty much drove the year over year reduction in EBITDA on a consolidated level.
The segment results that Mark will present clearly show this impact.
Adjusted EPS was 39 cents similar to last quarter really further demonstrating the resilience and stability of the business even in these disruptive times.
Operating cash flow was absolutely terrific at well over $100 million for the quarter, bringing year to date to 178 million.
Yes, actually above I feel your guidance range.
I mean, this really reflects a very strong cash conversion and underpins the increasing guidance, which mark will cover shortly.
Bookings were healthy and government one adult all times.
Remember this does not include the large award announced Nasas Marshall Space Flight Centre Dot remains in protest and thus we excluded from our backlog until that protest as a result.
Bookings intact, we're very very strong also a 1.5 times they pleasing.
Overall backlog cover came down about $1.2 billion. All June two deep bookings, we have made an energy.
Tied to our portfolio realignment.
These de bookings primarily relate to pass through revenue associated with very low margin Reimbursable EPC projects.
That have either been canceled or indefinitely delayed.
There is no impact to profitability as a cost as a consequence of these de bookings.
The good bookings in government on tech under reductions in energy are all consistent with what was expected coming out of Q1 on support a stable forecast on unchanged piano guidance for the rest of the year.
[noise] onto slide eight.
On a bit more on the significant portfolio realignment.
And you will recall this view was driven by the disruption in the energy markets globally and will come to that in the SEC, but but going forward. We will operate a two segment model as you see on the Chuck.
Well up to speed without government solutions segment, which which cost realignment will represent approximately 80% eight zero percent of KBR.
It is focused on mission critical activities as we strategically move up market to higher end on digitally enabled solutions.
We have presented a number of times the attractive profile of the cost the contract tenures the margin profiles on the associated cash generative qualities of this business.
Given our recent government solutions and focus day, you're all hopefully well informed on this business and its attractive qualities.
So moving onto energy.
We have or are we are in the process of exiting commoditized services, including construction on lump sum EGPC, including LNG.
I've already mentioned the significant de bookings associated with our exit for these high volume low margin activities and Mark will present late to the associated mainly noncash impairment and restructuring charges as we reduce our footprint and remove costs.
Looking at our legacy technology solutions business. It is clear that although this this business has and continues to perform it would benefit from an advisory consulting capability focused on emerging technologies in energy transition on sustainability.
Plus it would also benefit from greater Opex exposure and to some extent scale.
To this end as part of future Ts, we will invest in meant our current advisory and consulting business.
And our technology led industrial services business.
The latter leveraging off our proprietary digitally enabled remote monitoring solution linked intrinsically to our technology.
This enhanced technology solutions segment will arguably reduce its current low risk profile rotate attractive cash conversion metrics and we'll of course be even more resilient.
Let's move onto slide nine.
Kevin We've just been talking about tech might actually be best we start on the books on the right.
It is worth noting at the bottom the book to Bill as I said earlier in the Heritage T segment was a pleasing 1.5 in the quarter and this was across ammonia olefins and refining and the sustainability area a brilliant result.
We see good demand and the fertilizer market on closed a sizeable deal in Q2 that would back in a statement up.
The olefins market is very active again and in Q2, we closed a number of deals in Asia, including China.
As you would expect that is increasing demand for technologies that are more sustainable or not I think a good example of that in Q2 was the rules unit, we sold to a refiner in Latin America.
You will recall that our rose technology significantly significantly reduces sulfur content, and thus sox and Nox in fuel oil.
We continue to build our energy transition portfolio via our advisory business.
Good morning, being a professor transportation auction for hydrogen.
And with our technology position on ammonia and work at NASA on hydrogen storage being key differentiators for KBR.
So our pipeline remains strong activity levels remain high even in these times.
And that's kind of help but I guess with our limited exposure to they're finding market with exception of course, the green technologies I mentioned earlier.
Clearly twentytwenty will be a transition year for new tech as we shape the portfolio and thus I would direct you to the following.
Our overall adjusted EPS guidance for all of KBR remains valid for 22 and team are reaffirming that guidance today.
The legacy yes, our legacy energy business will be marginally profitable as we stated previously and not again happened in Q2, and we stand behind those statements.
So the key metrics, we think for new Ts are in 2021.
We are forecasting revenues close to a billion dollars with margins in the mid teens.
This will result in strong earnings growth from what would be a combined Ts and he asked legacy businesses and Twentytwenty.
As we continue to remove costs and Bell does the advisory and technology led industrial services businesses, we do expect margins to grow 1% to 2% per on them up to high teens by 2024.
I will try to look at appears and this is very much in line with those who have a balanced opex on capex facing technology business.
Now onto government and the left box and our recent Infocus day, we highlighted our strategic growth vectors and I hope articulated the rationale for strong bipartisan support and areas, where we are actively involved.
I will touch on low cost five as I'm sure. It would be a question later.
We have transitioned on north call on and that's the piece in the in the U.S. and activity levels are actually higher than we expected and these are actually likely to increase as the year progresses.
And you call, where we are we are the incumbent activity levels are also increasing a bit with a nice to increases in Poland et cetera.
In the Middle East transition has been delayed due to covert on a current task orders have been extended through to mid 2021.
With increasing activity levels in the U.S. in Europe, and now with more clarity through to mid 2021, we think our original reasonably conservative forecast, which included reduced troop levels in Afghanistan holds up well.
Also I was pleasing to note that our space and mission solutions business had very strong organic growth year on year.
And with the most see when likely to start this year.
This growth is set to continue into 2021.
You will also have seen a number of announcements related to our engineering business. We've talked about the attractive contract vehicles, we have the improved speak to speed to market et cetera.
And they delivered over 150 million of new idea Q wins in this quarter alone so terrific.
The last point here as the low levels of Recompetes.
Just a reminder, recompete activity on risk is low this year on next year.
Ill now hand over to Mark.
Great. Thank you Stuart and I will pick up on slide 11.
Stuart already hit some of this upfront.
As you've heard Q2 came in as expected on the piano front and higher on the operating cash flow fronts, we're really pleased with that.
EBITDA margin for government Antech were strong.
At 11% and 26% respectively.
So we're really pleased to see ongoing strength and continuity there also.
Overall gross margin was lower which we expected with considerable volume coming through on the cost Reimbursable Pcs on the energy side, which was very low margin.
As we said those types of projects will phase out over the course of this year under KBR Reimagine.
This effect was offset by significantly lower SGN a across KBR result of deliberate.
Cost reduction actions we've taken.
Netting together all of that Q2 operating income before the special charges was pretty much a push year over year.
We will see some of the low margin EGPC work carry forward into the second half.
But as the year winds down we expect this to ramp down and gross margins ramping up accordingly.
Tying into what Stuart said about what we are targeting for 2021.
All that that we expect asks you need to continue to trend in the 70 to 80 million per quarter for the rest of this year.
Interest expense continues to trend down reflecting the lower rates, we negotiated earlier this year and the associated debt reduction action taken down as well.
Adjusted earnings per share was 39 cents for taxes and other non operating items coming in as expected.
Cash generation was outstanding across all of KBR, including energy.
This is attributable to ongoing focus of effectively managing working capital, which pretty much comes down to the teams, Florida prompted billing and collection with team's done that really well.
Operating cash flow to net income conversion has exceeded 150% so far this year.
Underpinning, the increasing guidance, which I'll cover in a moment.
Let me briefly cover the nonrecurring impairment and restructuring charges in Q2.
As Stuart outlined we made the decision this quarter to no longer pursue commoditized construction services and Lumpsum EGPC projects, including LNG.
As a result, we've reduced our long from forecast to exclude those projects.
We also committed to a plan to rightsize, our cost base across our business to remove excess capacity.
He steps are an important component and Reimagine NKTR.
Giving us greater agility and do think profitability in the years ahead.
These charges tallied up to just under 100 million pretax mostly non cash.
However to slide 12.
For both government and check you can see the step down in top line revenue as Stuart said earlier, primarily tied to the episodic Tyndall revenues last year on the government side.
And mix on the tech side.
The 9% growth in spaces are real highlight with the new Marshall space Flight Center, when hopefully providing further boost later after that protest clears.
It's important to highlight the significant EBITDA margin expansion achieved by each of these businesses this quarter.
As a percentage point for government and six percentage points for technology, reflecting favorable revenue mix strong execution and proactive cost control.
The technology profitability, the technology profitability level underscores the resiliency of providing innovative intellectual property to the industrial sector.
We sold solution in the three main sub verticals of this business in Q2.
Ammonia tied to fertilizer for food production.
Olefins type broadly to the industrial production sector.
And even in refining where despite industry challenges our solutions to support our clients important sustainability initiatives.
Margins in energy were low but in line with our guidance last quarter at breakeven or marginally profitable for the year as we phase out the lower margin work and reduce the cost structure associated with those areas.
I'll move over to slide 13 capital matters.
We finished Q2 with a gross debt to EBITDA leverage ratio at 2.5.
The net of cash coming in at 1.1, that's all in line with what we expected.
Our capital deployment priorities have remained steady and there's no change on this today, but there are a couple of other developments to share.
With this latest step in our transformation, we have further reduced our risk profile increased our stability and predictability.
At a path to improve our margin profile and remain attractively cash generative.
This is on top of the significant growth in our earnings base excellent cash flow production and several de risking accomplishments since we set our original gross leverage target of two dot seven five a couple of years back.
These advances have improved our credit rating and lowered our cost of borrowing significantly.
With all of this is appropriate to increase our targeted debt to EBITDA leverage ratio to free Dato going forward.
Which is right in line with our federal IP services peers.
This increase enables greater deployment of capital towards strategic and accretive M&A and or buybacks as opportunities present themselves.
The decision to low to no longer pursue lump sum APC business also presented an up another opportunity which we.
Took advantage of in Q2.
No lump sum EGPC means we consequently has very little need for performance letters of credit, which are commonly required for these projects as you know.
At the same time, we want to be position to deploy more capital as Jeff discussed.
In June we were able to convert all of our performance L.C. capacity to committed revolving line of credit capacity dollar for dollar.
As a result, our revolver capacity increase from 500 million 2 billion.
No changes in pricing grid for it to counter.
This move Bulkers overall liquidity Influxes strategic options as we move forward.
Forward.
Okay finish up on slide 14, with our updated guidance.
As stated earlier Q2 was on or above expectations across the board.
We are reaffirming our adjusted EPS guidance of $1.50 to $1.80 for this year.
And on the strength of the first half we are raising our adjusted operating cash flow guidance to 210 million to 250 million.
Now back to Stuart to wrap it up.
Thanks, Mark great job as ever.
So final slide so in conclusion, another resilient quarter with operations performing on delivering as a result, a notch above consensus.
And as Mark said, we're reaffirming our adjusted EPS guidance for the year.
Book to Bill was strong ngs and especially in tech, but the stand out for the quarter was our cost performance, which allows us to increase the or cost guidance, you've just had.
Our portfolio review was concluded actions taken on the results in technology solutions business is very exciting.
More forward facing and more resilient and importantly, we are retaining the sizable tax shield pertaining to this business.
With the update on the you know oil mater, we are no very much focused on the future.
But our recent investor event, we laid out the tremendous progress, we've made and transforming and diversifying our portfolio to drive meaningful long term growth and profitability.
We have effectively transform KBR through some significant portfolio changes substantially de risking our business investing in our technology segment and transitioning approximately 80% of our business to focus on government solutions.
Different from a few years ago.
Well, we've made important progress we are not resting on our laurels as we move forward, we remain focused on reshaping KBR and moving further up market with higher margin sustainable on resilient businesses.
As we said in June we continue to see opportunities to drive growth, both externally and organically.
Theres more to come on this journey to transform KBR.
Thank you and I will now hand back to the operator, we will open the call up for questions.
Thanks short so as a reminder, if you would like to ask a question. Please press star one.
The telephone keypad.
Okay and the speakerphone. Please make sure that your mute function is turned off to now you're still to reach our equipment.
Again that star one to ask a question, we'll pause for a brief moment. So it was an opportunity to single for questions.
Just as a reminder of pop star one to ask a question.
We'll take our first question.
Jerry remember from Coleman Chief.
Please go ahead your line is open.
Yes, hi, good morning, everyone.
On January.
Hi, I'm wondering if you could talk about the organic revenue performance of engineering.
Yes.
In the quarter.
You mentioned there are some momentum in terms of Bob when you bought translating to revenue burn and can you talk about the students revenue burn for Sanquin space and engineering over the balance of the year.
Okay.
I mean, Jerry I mean, I assume you're relating to the comments around the bar and on the what was the energy solutions business.
No.
Thank you, perhaps you know I'm talking about.
With that.
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Oh within government solutions.
I mean, what we what we what we have seen in the in the and the revenue burn for the engineering business I mean, it's all pretty well in line with expectations.
I mean, they've been very successful at building backlog and the growing nicely and they continue to perform to deliver good margins I I don't see anything out of the ordinary there at all.
Okay, so the year over year.
Underperformance government solutions was was entirely driven by both logistics.
And so part of the is the people Air Force base, but anything else that's.
Driving revenue performance.
Yeah, I mean that the we had we had nice year on year growth in the the the space business.
Just on the double digit growth there the engineering business performed as expected and as I think Mark alluded to we are actually stated we saw a don't take and logistic side, primarily because of tyndall and a bit less activity in the logistics business in the middle East.
And I'll just ask Eric.
All of the all of the reduction was in the logistics for the reasons Stuart mentioned engineering was pretty flat year over year they had a.
Sort of an episodic goodie last year.
So a tough comp there, but as you've seen the righty Q ones have been great.
For most quarters, we've had in the last two years they've been growing we're very bullish on that continuing going forward.
And again you know the highlight was space of course, but we've shown that that that does swap from time to time attention hearing and even logistics.
Given given the type of agility, we had on our contract vehicle base.
Okay.
Then you folks continue to deliver in government solutions margins. It could you talk about what went right quarter with a bit more context.
Why we should not break that that continues into the back half midyear.
Oh, I mean, I think we're seeing absolutely stellar performance and particularly if I mean across our whole portfolio, but interestingly enough, particularly in a logistics business delivering.
Margins the are.
Quite exciting in terms of our guide going forward.
We are conservative we've guided at the high single digits and we we get asked this question I guess every call because every quarter, we seem to do a double digit returns and and obviously the you know the margins are that margin.
We'll be a good way to describe it but but I mean, I think as we as we look into our planning for next year and.
We will come back and neither reaffirmed our change that guidance as we as we get closer to the answer is difficult to give longer you know the longer term guide there right now I think Jerry just given what we're out and with that with the shift in the in covered and things like that although we are performing really really well.
To say that's going to continue beyond the end of this year and we need to have a good look at that.
Okay. Thank you appreciate the discussion.
Thanks, Gary when.
We will now take our next question from Tobey Sommer from Suntrust. Please go ahead. Your line is open.
Thank you.
Just to clarify something.
There are aspects of the.
Energy business that will be retaining them technology.
Or are you simply shutting down aspects of our parts for sale you could just speak to that that'd be helpful.
Yeah.
Right told me that I think the way to think about this is that our advisory consulting business. Our practice was sitting at within energy moving not across into technology and the reason we're doing that as that has you know whether it with a differentiation we have with our ammonia technology and our and our knowledge of the hydrogen storage and things like that.
From the what we do with NASA, we feel that that our technology business would benefit with having a tip into spear advisory consulting business looking not only a hydrogen but also at things like energy efficiency, and recycling and and electrolysis and things like that so so very much I feel that that's a very strong fit.
We also looked at the technology business, Fay Fay sorta seriously around its exposure to the opex market, which I sorry, the capex market, which which are predominately is at the end of the day you know, it's all about a building projects and those projects. So basically you know acquiring our technology and and we felt that although the business.
This has performed really well and difficult cycles in the past and continues to perform today.
Even with reduced.
Corruption in the the energy market, we felt it would do well to have greater exposure in the in the cap and the Opex site.
And we've also got a proprietary.
Remote monitoring capability, so effectively we can run the facility sitting in the office in Houston or elsewhere.
Regardless of where the facility is in our technical experts who understand the technologies can tweak. The operations are advised the operators what to do to get enhanced capacity in throughput and reliability and things and we so we felt that there was a fantastic opportunity.
To to really look at how we build a greater opex business, including catalyst for that matter with the tech business. So we asked the tech business effectively are there any bits of the energy solutions business that you feel would be synergistic and add value to two that endeavor, which which the which they did and they've.
They can end bits of that that the allows them to broaden their capability and their I guess their customer reach in the Opex side.
I'm not cannot dots and the reason for the artist to get that balanced with Capex and Opex that we think will prove.
Very resilient into the future.
So I think all all that bringing together we've exited all the bits of that we want to in the old energy solutions segment, Commoditized and low margin and pass through and.
And all the things that we've talked about before and the new technology solutions on the enhanced technology solutions segment.
I said to my statements and 2021 will deliver it's about 1 billion dollar business and we think margins will be in the mid teens.
But will go up 1% to 2% a year as we continue to take cost out.
And we see the growth in this technology led opex facing industrial services business, but also.
Advisory consulting business continues to grow which has very very strong margins. Indeed, so so we feel that that really sort of puts and positions that the new tech solutions business.
It will have arguably a lower risk profile, because you've got capex and opex. The now than it does today I mean, its bids risk profile that is very low skosh conversions will EMEA runs a negative working capital and we we expect that to be similar.
And and and obviously, it's a it will prove to be far more resilient. So that's a long answer to your question, but I wanted to make sure people understood that this was a substantial realignment and a substantial change.
Thank you could you.
Let us know whats the acquisition market looks like in me to bolster your industrial services as well access.
Consulting advisory piece.
Also refresh us on the.
The tax item that you said would be retained.
Yeah. So I mean, one of the one of the positive outcomes of the of the by taking the bits of energy across the added value to the Opex piece of Tech as I explained was the historical the legacy energy solutions business had a tax.
Build all quite a substantial tax yield I don't think we've actually ever disclosed the size of that number and the event of.
Of something happening into the future without business and were able to move that tax shield across into the new technologies technology solutions segment.
So that starts that piece and then in terms of the acquisitive landscape I think in terms of the the advisory piece I think it's all about people, so where we're looking to acquire capability rather than go and buy companies, there and truth and and then the industrial solutions piece, where actually sticking out more white space than than that.
Because it's really our IP and our technology that we're leveraging often and our proprietary sort of solution around remote monitoring. So I do think that the investments that we're going to make there is really about actually just just developing further that capability, but actually getting in around the product development piece of it and making sure we're out that tone to it.
Customers about the value add and enhance commercial outcomes. They can have as a consequence.
A lot, but in terms of the broader M&A market. Good question.
And that we've seen trading multiples come down and with our Governor appears a couple of tons. During this last little while.
The heat that was in the market historically, while certainly in 2019 anally Twentytwenty on government services company multiples as probably come off a bit and we've got a very strong balance sheet. Today. So as we've talked about before it gets a lot of frogs and as long as it does things hold up to our acquisition thesis.
Keen to look at strategic.
Many into the future, particularly the cost of capital deployed it is today.
Last question for me within the government services space.
Area of your business you at this stage expects to see the fastest growth.
I think yeah, I mean, it seems to the nice thing about that business as it ebbs and flows depending on timing of awards and things I think we said this before I think.
Over the last three or four quarters, we've seen logistics grow the quickest and then the next quarter. It was engineering and then ex the next quarter. It was it was space. So so I mean, I do think ebbs and flows I did say in the in their remarks that our growth in space and mission solutions is terrific cat year on year, and we of course, who won the large marci.
When virtual post protest will obviously be I kick it to that to the revenue in returns associated with that business. So that we expect that business to continue to grow by our pipeline remains really robust across all the aspects of what we're doing and government and.
I think I think you'll see them passing the baton quarter on quarter I don't I don't see.
That.
Well I'm seeing in the pipeline anyway that it's going to be one that dominates the other.
Thank you.
Moving on to our next question, we will take from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.
Hi, Good morning, Okay, I guess my congratulations on a net CRE I guess my first question.
We're exiting that fixed price portion.
Energy business, you guys not taking some restructuring understand guidance it sort of 78 million corporate team on for the rest can you hear about I'd be lucky 2021 and beyond.
There are opportunities to further streamline your cost structure because of that are just because of Watson on some code that.
My second question, I think Gary sort of answer that but ER asked the questions like you know on your when you had your government solutions panel stay there was a slide in there that talk to you.
The government solutions EBITDA over the next several years as well as your implied marketing, that's right, which I think you're right. Your implied margin target I'm getting a lot of questions from investors on whether or not that what sort of I own guide her 2021, or just sort of what you know today that you just help us from that perspective.
Thanks.
Okay. So maybe a Jamie and thank you for your comments on the quarter.
The so I think maybe answer the second question first I mean, we get a lot of questions about the margins associated with GE asked just because we continue to outperform what we've said.
We haven't given a guy for for 2021, we gave long range targets I think I way back in 2019 in May at high single digits and I think we can.
Right.
In terms of its not a literal guide.
In terms of the margins specifically for 2021 real only do that when we actually gained 2021.
But I do think that the performance of this business.
Has been terrific innovate if it continues to perform.
And I mean, there's no gun guarantee we'll get the them the margins we got this quarter, but if it continues to before to perform we can see a path to obviously those continue in high single digits and.
And specific quarters coming in to two low double digits as probably all I really want to say there because you will hang we had to divest say too much more and we don't deliver against that I think that we are delivering really while the operations are performing really strongly in the cash generative qualities that business a terrific. So I think all all in its more than just margins.
It's a cash conversions as well and we're very pleased with that.
And in terms of here.
Your.
First question, which I am having said all the I've actually forgotten what it was so you have to tell me.
Right.
Yes. Another first question, we see opportunities on the corporate Keynotes I just did you exit the energy and yes, yes, I'm confident that opportunity 2021.
Yeah. So the I think the way we've tried to encapsulate. The is that we've got margin increased targets that we talked about associated with what was in technology solutions going forward.
And we do have.
Does take time I guess, two we've got many many entities and things that were associated with the old energy solutions business that where we're trying to close down and we'll take cost out as we progress of the go forward and I think that flows into the 1% to 2% margin increases we as we look to to so there's a.
To grow that business and beyond 21, So I think I think you'll see it coming through there we haven't really guided beyond that but I think that as a that gives you I think those margin improvement opportunities are pretty significant obviously.
Great taker.
We'll take our next question from bottom cut off from Cowen. Please go ahead. Your line is open.
Yes, two questions good morning.
I got them.
Mark perhaps you can answer this just if you could speak to the G.S. margins.
I was asked about in the last question for next year, maybe just can you quantify what the known headwinds are because you know you guys have benefited in the past some nonrecurring items.
Just want to make sure we haven't calibration on.
You know what the known headwinds are moving in.
2021, and as a follow up if you could just maybe re baseline on costs on what.
We'll be the base of energy you know revenue that you will keep on an ongoing basis. So you know what is.
Maybe quantify I want to 2020 basis or 2019 basis the type of business.
Youre no longer pursuing how how large was that so that as we move out in time, we have.
Re baseline to what is recurring thank you.
Okay I stood I'll get started going to try and then of course will I think we were quite clear in our government solutions investor focus today, a day back in June on the G.S. margin.
Outlook.
Very clear that the current period and also into 21 does benefit from the wind down of the aspire capital works program, which is performing extremely well.
And that does come to a natural conclusion.
Toward the end of 21.
And so that mix mix it comes from that beneficial margin today, we'll start to.
Go away at some point in the latter half of 21.
And all other things being equal.
I would have the impact of.
Taking the margins down by as much as a percentage point, if you'll recall that in that Investor day, and so that's the most specific.
Im that is known there can be other things that come across that a change that.
But you know we're very proud of that program, it's delivered marvelously well and as they.
Cornerstone of our international business, collectively which has margins above.
The U.S. side.
And it's actually growing very well in certain pockets as well so what we know today as the aspire wind down represent.
The answer to your question there.
Just the capital works portion of the other two portions continue.
Which is the services component and the equity in earnings component.
So as George said, there are opportunities to to go the other direction and we're working through over the rest of this year and then we will provide a formal guide relative to that target once we start 21.
Relative to the second question on the energy side Stuart mentioned earlier that the.
Notional target size for 2021 of the new technology solutions business, it's circa $1 billion.
And you already know.
The run rate of the Heritage Tech solutions business at 350, 400 million and there's no change to that obviously given a stellar performance.
Therefore, the difference roughly 600 ish.
Every piece of energy coming over.
And that is roughly.
A billion less than what you would see an aggregate run rate this year.
Sure.
Yeah, I mean, I mean, I think on the margin questions are than what Mark said, we'd there are no specific headwinds that we see growth and.
I would argue the performance of particularly our logistics business at the moment as stellar in terms of its operating performance in the and the margins as returning so.
So I think there you know this opportunity to continue to do very well and not arena.
Regardless of AIDC that CAFTA works spire defense captive West program coming off as Mark said, but that doesn't really come off till the end of 21. So so again 21 should be.
Should be quite positive.
On March quite right, you know the technology solutions business or say this.
I would kind of almost died.
No ignore 2020, but it but it is our our Dod don't do the comparator of 2020, because I think it is a transition year in terms of that portfolio realignment I think in terms of your model I'd be looking it at a business that is as Mark said $1 billion and and.
The mid teen type margins and growing those margins in growing the revenue base.
What we think double digits beyond that we guided to exact numbers, but we have guided tech historically.
We don't we don't foresee that changing too much given what we just said and the book to Bill is that how they're performing so well.
So I think that's probably a good way to think about government.
Excellent. Thank you.
We'll now take or next question from Steven Fisher from year to screw heads.
Thanks, Good morning.
Good to see the cash flow performance, giving you some flexibility, but curious for a little more color on why you're raising the leverage targets is it.
Just to really kind of be in line with peers as you mentioned or is it because you see an opportunity to to be a little more aggressive on the buybacks or I know you touched about but on the M&A opportunities and if you're going to be generating a consistent solid cash flow seem like.
With a higher leverage target and solid cash flow that would imply more more deployment of capital. So just kind of curious little more color on that.
No I mean, not I mean, you're right in all three.
Steve, but I'll, let I'll, let mark on sort of more specifically, but obviously yeah. I mean, you are correct and all three in terms of peers in terms of.
Deployable cash opportunity and what it means so maybe you can go a bit more specific mark.
I thought it was fairly purposes specific earlier, but Steve you know we set the 2.75 back in 2017.
There was a very different risk profile in the business then.
But conceptually we felt we needed to be more conservative given the volatility we had in our energy business at the time is still in like our government business was not in there you know nearly the scale it is today and.
And so it is a.
I think it's just as I said earlier appropriate to set our capital structure and align with our business profile and the risk and body and it.
And we firmly believe.
And you can conservatively so.
At a threed auto leverage ratio, where the type of business we have.
Sets the right Tony and.
The effective lowering our cost of capital versus a lower target and that's where we should be in terms of.
Oh level setting the debt and to deploy capital with what leverage that gives us.
So nothing really more to add I think it that it natural and positive evolution of KBR.
And.
And it's also very much in line with the federal peers as I said earlier, sometimes they have excursions above that to do M&A and that's.
That's a natural and generally speaking this sector has de leverage down very nicely after making those excursions given the cash flow policies.
That we see in this business and those equally apply to us.
Yeah, I was just trying to get a sense of how motivated you are to really start deploying capital it sounds like there.
We'll be opportunities to do that.
Okay.
Second question, but I did I mean, weve I'll, just say that you know in.
In 2016, we made a couple of acquisition, we integrated them well benefited us tremendously we did the same in 2018 integrated them well.
Let's do it made mention of.
Calculation or improving a little bit in that space and cost of capital very attractive right now in general and so that does that up to.
Favorable conditions to deploy capital certainly.
Got it.
And just up one of the asks about the profits from the legacy technology business, obviously ticked down.
Little bit this quarter than the first quarter, but that was to be expected given I mean, what was going on in China earlier in the year bookings. That's on the you gave us the 2021 revenue and margin metrics for the new combined entity, but just kind of curious.
How you see the trajectory of the the legacy technology profits ramping over the next few quarters.
You know how long of a gift you see year I did have a nice went on a quarter is appointed out how quickly Wallace.
I can see business start ramping up again on its profits.
I mean, I think that take business, Steve This quarter did exceptional in its margins. It was 27% I think as the the number mark of there's the is the.
So I think we guide to mid Twentys for that business and some some cars is up in some quarters has done just depending on the on the cycle, if you're selling the the license piece of that the margins are up if you're selling associated proprietary equipment is down and if there's a mix of catalyst to somewhere in the middle et cetera. So it does it.
As ebb and flow, but I think the we're not seeing any reduction in the and the margin profile for what was the legacy Tech business is still going to be in around the mid twentys.
And I was talking about the dollars serving the Dod dollars.
Oh, the EBITDA dollars, Yeah, I mean, I mean not side, we did expect the volume to come down.
I mean, we've guided the year at around $75 million, So EBITDAR and ZIP code it can be a touch above a better around that number.
We expect to two to do that or a little bit better I think is really.
That will be spread out over the quarters going forward from what we've achieved today.
Okay fair enough. Thanks.
Thanks.
We'll now take our next question from Michael do this from vertical research. Please go ahead. Your line is open.
Thank you operator, and good morning, Austin Mark Stuart.
Hey, Mike.
The.
At the entered with the energy transition.
Remind us I assume at times, you do with your technologies and market selling in the marketplace do some EGPC work for the customers are advised them on that.
How are you going to handle those types of opportunities going forward century exiting that side and are there any with these master service agreements agreements you have with your energy customers is that a way to kind of transfer some of the technology into their customer base, given the opex kind of industrial technology focused that could leverage going forward.
I I mean, yes, yes, the answer to the second question in terms of the the and it's quite an exciting opportunity for us given the strength of our IP.
In terms of the first question, we don't do EGPC projects My cannot technology business, we sell we sell equipment proprietary equipment and as part of our license package the others take the PC risk and we we expect an energy transition, where where those ammonia is being used as a transportation fuel for hydro.
In our et cetera that we would stay true to our statements that we will not be taking MPC risk and not segment or any segment for that matter.
Well that that makes that makes that makes perfect sense and I guess the.
A follow up from from me on the.
On the government services side, but I know you covered much of this and on the in the June deep dive, but you know as you're aware, we move forward toward September annual elections et cetera.
Just some observations met you've seen from me from the customer base or anything that.
Gives you some pause or some excitement or staying steady as she goes given where your positioning is relative to appropriations that we could anticipating the changes that are going to occur with Congress administration.
Yes, you're right, we did try and give quite a bit of color around and the in focus day, we do feel and I think I said a bit of this in my remarks, as well that wherever position today those are particularly in a number of ASIC a very strong bipartisan support the budget for next year is very robust and and.
And this robust in areas, where where we are where we are where we're playing I think we've got very strong deep domain expertise in those areas and.
We've got very very long contract 10 years as well the underpinning the future growth of the business and I don't think that should be underestimated as high voluble those contract 10 years are.
You know the stability in the I guess the visibility they provide as we as we guide into the future. So we're feeling pretty good about that.
We feel pretty good of where we're positioned today and I have to say the customers are behaving immensely while globally in the face of quite interesting time. So so I think all up it's the business is not only proving resilient as I said earlier the pipeline of opportunities is tremendous and we're very very excited about the opportunity to grow across.
Our.
It is.
I guess sub segments.
Yeah, I put that slide on amongst many of the helpful slides in the presentation in June up your long term aspect of what you guys happens I think we're certainly very helpful. One visible fifth street appreciate that thank you Sir Stuart.
Thanks, Mike.
Moving on to our next question, it's from Sean Eastman from Keybanc capital markets. Please go ahead.
Hi, Good morning, I, just wanted I started on a going back to the corporate DNA side I mean.
You know, it's really helpful to get some guidance on the go forward sort of new technology segment margin profile next year.
You know in light of almost <unk> billion in revenue coming out of the system from legacy Energy solutions I just wanted to understand the potential to rationalize the corporate DNA around that.
Maybe you know.
Relative to that revenue coming out.
How much corporate DNA structure that was in place or has been in place to support.
That rather than their particular any any kind of thoughts around that just even from a high level would be helpful. Because we think about next year. So I'm going to yeah, I mean, mark can talk a bit more by the the corporate asked DNA and a second.
But I would write to like to just reaffirm what I said in my remarks, the removal of the de bookings of of the the mainly pass through work and low margin Reimbursable APC projects have been stopped our stalled or canceled.
This does not affect our profitability whatsoever.
Just wanted to make sure that was that was clear.
And I'll hand over to Mark to talk about asked DNA and the opportunities we have there.
Yeah, Shaun and I'll go back and what we said actually last quarter than we were confident that we couldn't take cost out at pace with the revenue changes.
And retain the margins of the surviving segments. If you will.
You know, we're very focused on the bottom line and I think have shown.
Good constraint of cost over the years.
As we've grown to deliver what we said we would deliver and next year it won't be any different than that as we approach the budgeting season.
I will say that the.
Energy business did have it your fair share of complexity. When you think about multi billion dollar APC projects.
There are systems and tools and.
Legal entities and all kinds of stuff that goes with that and so you know some other restructuring takes that from the restructuring charges takes that out.
But there will be a journey to to rationalize some of that out of the system over the next one or two years.
And to be laser focused on the two going forward and so I'm more comfortable in our profit targets there are opportunities.
Both short and long term to rationalize costs.
Some of that will happen faster than others.
Because it does take some time to unwind things and in other cases, we may invest.
Certain things to make our tools better for the longer haul and so we'll guide on that going forward.
70 to 80 is our guide for the rest of this year I certainly don't expect that tend to go north.
As we think forward, obviously and we'll give you more precision come a January February as we get through the year end, we evaluate what we went between now and then.
Got it I really appreciate that and you know the other thing.
People are focused on its just a as its come up a few times as you know aspire capital works ramped down next year I think you guys touched on the.
A large inside of that but from a revenue perspective, I'm just trying to understand.
It just considering the.
Very low recompete risk this year and next year.
You know, there's still a lot of opportunity to backfill that wind down between now and sort of when you guys come out with that's normal government services outlook for 2021 is that kind of fairwind about things.
Yes, now we've got massive opportunity as I said before somebody were really looking at that our pipeline quite a.
Terrific at the moment and.
You know we continue to announce a number of awards as each month passes and <unk>.
Our ability to two to fill in non.
GAAP is is certainly in front of isn't I think our current performance shows that we can we can perform if we get it right above guided margins and so I think all with both of those in mind, you're absolutely correct.
Okay. Thanks, I appreciate the color. Thanks.
Yes.
Moving onto our next question is from Andy Kaplowitz from Citi. Please go ahead. Your line is open.
Good morning, guys.
And finally.
So you mentioned the 9% growth in space in the real highlight we know you highlight based prominently at your Investor Day. So maybe you could talk about your visibility into continuing strong growth and that's sub segment could you talk about your opportunities to take share moving forward, especially with the understanding that there could be every year and change in Washington.
Yeah, So remember our space in mission solutions businesses, Mcgarr, NASA franchise, and obviously that continues to grow and has the basis to do so with the mostly when we also have a human health performance piece in there and.
We're seeing a number of opportunities coming down the pipeline.
Building on not only what we do for for the astronauts in undermined the audience. We are the only company in the world as I say license to train astronauts for for commercial space.
You know, we're seeing opportunities also building on that what we're doing for the special forces in the other branches of military so we see that as a continued.
Growth vector in that arena, and I guess the third piece.
It is also related to our engineering business somewhat just and because of the what we do with with the Air Force. There is really military space. You know, we we have a fantastic pipelines of opportunities and not area and it's and it's not it's not somewhere where we do a lot today. So anything we do there.
It is very strong bipartisan support of course and not arena given the appears rights. So we do think thats a significant opportunity for us and we've got as I said not just a it's not just.
But its objective in that sense does quality opportunities that we're bidding today.
Thanks for that Stuart and then sometimes when you get out does that mean see like business. There can be outstanding liabilities. So you know you took the 1.2 billion out of backlog in any of the customers that you signed contracts would come back in and require you to work on that project or or making pay some sort of cancellation theory.
And just Don.
One she's sort of take it out of backlog.
Yeah, I think I think and well I don't think those any exposure in terms of companies coming back and asking us for for any any money back I mean, and the main these projects are being canceled or put on hold indefinitely by them. So I mean, its best simply be kind of unusual for them to come back at that point.
And as we as we you know I don't think so I don't think there's any risk in that sense, our discussions with those customers on specific projects have all been done it up in a very amicable way and I'm seeing as exiting those into if there's one or two that we we have to just work out we'll we'll we'll tell you and.
You know will set aside in some sort of sands and nonstrategic or something like that but we don't expect not to be the case on and certainly the risk of adding going.
Bod intends commercially as a is just not there.
So we're feeling pretty good about that.
Thanks, Mike.
Thank you.
Moving on to our next question, we will take Mike.
I think our from Bank of America. Please go ahead.
Yes. Thank you guys for taking my question squeezing yen and they were running a little late just stupid your comments on on M&A and how service multiples have come off I appreciate that but right now your multiple.
Off as well I mean based on your Investor day, it's hard to see why KBR should have such a valuation discount to some of these government services.
Peers.
If there is the reason for that discount is we've got me now so is the best using your capital that you guys are now deploying more capital.
How do you balance that with going out into the market for acquisitions with really you value of shares that are out at discounts you to that peer group today any any help them color on that would be helpful.
Oh, I'm, India, but I'm glad we squeeze do in.
I mean as a terrific question to start with I mean, we would I mean, we don't know the reason why we trade where we trade you know this is the the 14th quarter and in a row of meeting or exceeding expectations. Our cash performance has been absolutely stellar we've driven down the debt levels to to while within below industry norm.
Arms in our.
Cost of capital as good as anyone's out there Mark and his team has done a terrific job and not a garden and you know we are.
Our performance in terms of operations has been there has been really good and we've retired risks as we've gone along and know the you know matter as you know is effectively.
Dealt with where the deal Jay and you've had comments on what's on where the FCC. NSF also we have retired such a lot of the legacy issues that we'd have a negative impact we think two to stock or people not understanding the story and and that we had there was you know a lot of concerned around our appetite to take lump sum MPC and LNG.
Market and went up when it became quite clear that is getting more and more commoditized as time progresses, our exit from Latin and our realignment to what we talked about today as a significant shift away from that type of business and the associated low margin piece of even or even the more attractive low risk piece, but it's very low margin.
And Commoditized moved away completely from that.
We are we don't understand why we're trading where we are so that that but there's a very very good could point to raise and then one working to address and we worked very hard to do so with.
The outreach to up to a broader investment base, who understand this part of the market really really well and with 80% of our business and the government arena and given the sort of work, we do there and I move up market and to higher end through time as a as clear I think can we presented on the Infocus day. So so I think I think.
That's probably enough said about dot and in terms of the M&A piece.
Yeah, I mean, the exactly exactly right you know that our acquisition thesis has been one where we don't buy on on cost synergy you always get some of course, but our whole focuses on looking for businesses that take into new areas with very little overlap, but a strong adjacent c. So that we can maximize.
Revenue synergy and I mean, they have to be good businesses and their own right with a good strong cultural fit, but but it's a very fragmented market out there, particularly in the U.S. and the Gs site. So so there are we do think there will be opportunity so sort of with cost of capital whether it is and you know our position in the markets and our strong balance.
We may be highly accretive opportunities out there to take us foster into our strategic growth factors than than than you can do organically, but.
The it's not easy to find those and.
But they do exist and we're working hard to two to do exactly that.
Oh, we're going to be taken our final question.
It's from Brent.
Please go ahead your line is open.
Great. Thank so I'll keep it to one Stuart.
This transitional decision to me doesn't seem to be just about being that sort of the majority government services contractor, but more about changing the risk profile and focusing on higher value services I understand.
Keeping her line, but when you look at the 80 20 mix.
Our government in technology is that something you want to deliberately maintain beyond 2021 is there a desire.
Build out this technology platform as a portion of the company and and diversified customer base.
Yeah, I mean, we do I mean, you're quite right, we have moved away and not sansone. It to these lower risk higher end solutions and I think the realignment of our portfolio is exactly that and.
And so there is the strong alignment there in terms of the that what we're doing digitally in the and the government side as well and moving higher up market from a service perspective also so I think this the strong alignment there in terms of the makes I don't think we've really said I.
Desired mix I think we were real we've tried to we've tried to help the street by giving them. What we think this business will look like when is when we when it shakes out as we go into 21 in the sort of the margins in the cash conversions. It will achieve on that billion dollar revenue base. So.
The in terms of the mix I don't think that Weve really gone and figured all that out yet we've given growth targets for a Gs business that we're standing behind three to 22.
We've given.
Indications of double digit growth in our and our and our new Tech solutions business.
On the attended margins and hopefully that will be be.
From a modeling perspectives us pretty pretty.
The year.
But yeah, we don't have any.
Predefine mix pieces, there, but but but we do expect the opportunities to be there, particularly on the on the higher end industrial solutions piece and on Honda in fact in energy transmission side as well as our ongoing and saw increasing disruptive technologies that come to market. So I think all all those vectors are strong but saw.
This space and what we're doing a mission solutions and so is there opportunity to grow our engineering I'd like to businesses.
And what we're doing in history, it's terrific as well so what kind of finding it also does it would be silly to put a false constraint on growing one faster than the other.
Okay. Thank you Stewart.
Mm.
That does have no more further questions I would like to turn the conference back to Mr. Brady for any additional are closing remarks.
Well. Thank you for your questions, we have run over overtime, but I think it's important to materialize those questions to be asked of us they will be having a more one on one sessions. After this but thank you for your time. Thank you for your attention. Thank you for the quality of the questions and now we're really excited about about the future in and what does this transform KBR.
So thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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