KBR, Inc.

Good morning. Thank you for attending today's KBR's second quarter 2025 earnings conference call. My name is Megan and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to turn the call over to Jamie Dubre, VP of IR with KBR. Please go

ahead. Thank you. Good morning and welcome to KBR's second quarter fiscal 2025 earnings call. Joining me are Stuart Brady, President and Chief Executive Officer and Mark Sop, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter and then open the call for your questions. Today's earnings presentation is available on the investor section of our website at KBR.com. This discussion includes forward looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on slide two. These matters involve risks and uncertainties that could cause actual results to differ significantly from these forward looking statements as discussed in our most recent form 10 K available on our website. This discussion also includes non gap financial measures that the company believes to be useful metrics for investors. A reconciliation of these non gap measures to the nearest gap measure is included at the end of our earnings presentation. Beginning this quarter for the current period and all prior periods, we are reporting results on a continuing operations basis with the impact of the wind down of home safe alliance JV reported as discontinued operations. Unless otherwise noted, the information presented herein reflects continuing operations only refer to note 17 in our form 10 Q for full details on discontinued operations. To facilitate investor modeling and analysis, we have provided an updated data sheet which recast historical results on a continuing operations basis. This schedule is available on our investor relations website and available via the QR code shown in the appendix. With that, I will now turn the call over to Stuart.

Thanks, Jamie and good morning everyone. I will pick up on slide four today as with all meetings at KBR. I'm starting off with a zero harm moment. The safety excellence awards are given each year to contractors or subcontractors with excellent safety records at an asset owners site. The award helps companies learn from each other by sharing safety ideas and best practices. Each year, the industry business round table selects the top safety performers from nominated contractors and subcontractors. This year, our Brown and Root joint venture won the top award for large contractors. Our Brown and Root JV continues to perform really well and has actually grown more than 30% post COVID. We don't often talk about the value add we bring to our unconsolidated JVs, but I think this is a great example of flow down world class programs delivering top quintile performance. Really good stuff. Now on to slide five and some key messages. Now, before we begin, I want to address the recent and unexpected termination of our Home Safe Alliance joint venture contract by US Transcom. Importantly, the company and our people put in a tremendous effort into this transformational program. We are of course disappointed with this outcome and while we wish our perspective had been more fully considered, we acknowledge there were operational challenges. We are committed to learning from this experience. This allows us to refocus our energy on our core business of MTS and our strategic vision is unchanged and KBR remains strong in our markets. With that, now on to our Q2 performance. First, we delivered solid performance on the top line with revenues of $2 billion and strong bottom line performance with adjusted EBITDA of $242 million. We generated an adjusted EBITDA margin of .4% up 70-70 basis points year over year. In volatile times, a strong focus on both bottom line and cash performance is extremely important. This includes cost management and delivering with excellence to improve margin performance overall. This focus really delivered for us in Q2 and of course year to date. Second, we continue to successfully execute a growth strategy through customer centricity and focus on key geographic markets, one of which is the Middle East. In addition, with the details of the Reconciliation Act of 2025 now available, today we will share how we are poised for growth in key defense areas. Third, we continue to demonstrate consistent, disciplined capital allocation with continued share repurchases and active management of leverage. Next, we are adjusting our previously provided 2025 guidance to remove HomeSafe and to address the impacts we've seen from DOD defunding of programs and delayed protest resolutions. The good news is there is no change to our profit and cash flow outlook and we are confident some of the business will be restored or replaced in the out years as the new administration settles and incremental funding under the recently passed Reconciliation Act starts to flow. As HomeSafe also had considerable revenue embodied in our long term targets, it's appropriate to remove those from expectations. Mark will be going into more detail on all of this later. Finally, we remain committed to creating shareholder value. Moving into this year, we reduced our organizational complexity by collapsing what was the international government portfolio, moving the appropriate business elements into what is now mission tech and sustainable tech to deliver greater alignment, synergy and efficiency. We are prioritizing pursuits in MTS to be commercially rigorous and aligned with the spending priorities in the new defense budget and expand geographical reach and STS as markets adjust to the new normal. This is intentional to enable strategic optionality for us to execute on opportunities to maximize shareholder value. Today, both MTS and STS are delivering strong bottom line numbers. Our pipeline and bids awaiting award are at record levels and we are optimistic that conversions are forthcoming. We are committed to making both businesses stronger on a combined or a standalone basis. On to slide six, I will highlight a few of our recent wins. Starting with MTS, we were awarded a subcontract with strategic resources to expand our psychological health services to aid army training. We announced the win of the Djibouti based operations contract worth $476 million, which is one of our major we compete this year. And we continued momentum with the Air Force Research Lab customer by winning multiple strategic contracts under the innovative cyber infrastructure threat assessment environment, which is called INCITE. Finally, we were awarded the log cap five contract extension through to 2030 for both UCOM and Northcom. Moving on to the STS segment, we recently won a large award for a world scale ammonia and urea complex. The client remains confidential. However, this win is significant as it demonstrates the commercial value of our integrated services and proprietary technologies and we're looking to apply this on several other ammonia projects in our pipeline. Similarly, we want to feed contract for the car electrical power production called KET in Iraq based on the KBR proprietary ammonia technology also. We were selected by BP for both detailed engineering and procurement services for the largest oil and gas terminal in Azerbaijan. And for the Shadini's gas project also in Azerbaijan. We are the partner of choice because we have local capabilities that are truly differentiated. Finally, you may have seen that Mitsubishi chemicals and NEOS announced the opening of the plastics recycling plant in Japan this past month, which uses the exclusively licensed hydro PRT technology from KBR. At the group level, we ended the quarter with a 1.0 PTM boot to bill and $21.6 billion in backlog and options. Slide seven. This quarter, I wanted to provide a little bit more color on our pipeline and the award cadence we are seeing in both segments. In MTS, we currently have $19 billion in bids awaiting award of which 72% 72% represent new business. This includes significant contributions from national security, space, national intelligence, test and evaluation and other US government priorities. As mentioned last quarter, we still have $2 billion in contracts that have been awarded to us as the winning bidder, which remain under protest. The extended delays have contributed to revenue shortfalls this year and Mark will touch on this later. Encouragingly, we have seen recent success in our new business acquisition efforts. The win rates for the first half of 2025 are up compared to the first half of 2024. Demonstrating that prior investments in BD are yielding positive results. In addition, we expect to increase our bids and middles by 30% in 2025. And this underpins our confidence in continued growth within MTS when government operations stabilize. This being said, the government contracting environment is changing quickly, particularly in the US. More funds have been directed towards national security with improved speed of delivery of advanced capability to the warfighter and cost effectiveness being driven hard by the new administration. I'll cover tapping this opportunity shortly. In SDS, the first half of 2025 presented a dynamic landscape with evolving market conditions. Shifts in global trade, regulatory environments and changes in energy priorities, including a greater focus on affordability and the balance between sustainability and energy access. And these have influenced project timing and market approaches. Despite these factors, the business has adapted to new opportunities, realigning priorities to meet the shifting demands of the industry. SDS continued operations across multiple energy vectors, delivering projects in established and emerging markets. Results from Q2 reflected ongoing activity in core markets such as LNG, ammonia and infrastructure. No significant competitive tenders were lost, but several large awards were deferred due to earlier challenges and are now anticipated in Q3. Heading into the second half of 2025 and into next year, the SDS pipeline remains robust and diversified with over $4.5 billion in opportunities for Q3 and Q4. We saw approximately $1 billion in potential awards shift from the first half to the second half of the year, bringing the total expected in the second half to more than $1.5 billion. In conclusion, demand remains strong, but decisions have been delayed. Thus, we remain confident in both our growth strategies and our execution. On to slide eight. We have a four-pillar growth strategy centered on expanding and key markets through delivery and innovation, achieving leading margins and then deploying capital back to our shareholders. As you know, the Middle East has been a core geography for us to capture breakout growth as evidenced by the 20% growth in the region on a trailing 12-month basis. And today, I want to take a deeper dive into this region. As we discussed earlier, the Middle East has been busy despite regional nuances. While there are priority shifts in Saudi to gas development, including ammonia and infrastructure, with oil and petrochemical development a lesser priority, Saudi is sorting through priorities across energy security, energy transition and infrastructure. We are seeing an offset in other countries, including Iraq, Kuwait and the UAE. These countries are also making investments to further their strategic policies for economic diversification, leading to increased industrial technology and infrastructure spending and are key focus geographies for us. KBR represents a well-known and dependable supplier in these markets with reference projects and customers throughout this area. In Iraq, we have a significant presence in country across several projects, including working with the Ministry of Planning directly to support the strategic direction of the country. Now Iraq aims to ramp up oil production and is investing in gas capture projects, petrochemical expansions and clean hydrogen economy initiatives. Similarly, in Kuwait, we have a strong presence and we also see a robust pipeline of opportunities. The country's vision 2035 includes generating 15% of its electricity from renewables by 2030 and developing up to 25 gigawatts of green hydrogen and ammonia capacity by 2050. In addition, Kuwait plans to increase oil output and is expanding gas production, refining capacity and renewable energy initiatives. And in the UAE, KBR has been a trusted partner to AdNoc for years and manages over $100 billion in capex on key programs within AdNoc's portfolio. Additionally, KBR has recently been awarded the TACA Nexus project to enable expansion of electricity and water distribution to plan data center investments. The UAE is investing over $400 billion by 2035 in energy diversification, decarbonization, LNG expansion, digital infrastructure, making it a global leader in energy and digital infrastructure investments. Our strategy focuses on building customer intimacy, really understanding client sustainability goals and offering tailored solutions. We maximize in-country value by boosting local employment, enhancing training and of course developing local talent. Our differentiators include deep local engagement, strong partnerships, rapid solution deployment and advanced digital capabilities. This is another example of how KBR's multiple pathways to growth provide an agile, resilient business model. On to slide nine. Details of next year's defense budget requests are now available and the Reconciliation Act has been approved through the House and Senate, as I'm sure you're well aware. So we have line of sight to the first of a $1 trillion defense budget, which is lined up for 2026. This includes an incremental $150 billion in spending for national security priorities on top of the President's budget request of about $850 billion for baseline defense spending. And it's a great time to discuss what this means to KBR. The new administration prioritizes efficiency and mission outcomes of which KBR is directly aligned through a technology integrated solutions and operational focus which have differentiated in the market. Starting with the RDT and E-Wedge of the defense budget, which is well aligned to our defense and intel business units. US Space Force budget, including reconciliation, is programmed for an incremental circa $11 billion. Now that's 35% more than full year 25 levels. KBR is well positioned to capitalize on this budget increase following our acquisition of Lindquist and Centauri and our positions on several existing contracts, including USSF specific IDIQs with limited competition. Golden Dome funding of $25 billion was included in the reconciliation bill. As this program matures programmatically, KBR is very well positioned through existing USSF, Army, Air Force and Intelligence community contracts. KBR has a long history of engineering support to the Missile Defense Agency on platforms including Patriot, SAD, Army, IBCS and various sensors, including over the horizon radar and low tier air and missile defense sensors. Given the urgency of the Golden Dome timeline, we expect much of this funding to flow to existing contracts and vehicles which we are well placed, such as the IACMAC and CIVR phase 3s. $40 billion of investment in future weapons systems creates significant opportunity that KBR is already actively positioning to capture. We have a strong pedigree of engineering expertise and technical support to several programs that are in higher demand in the new budget, including Patriot Missile Defense, LTE, AMDS sensors, SAD and IBCS. KBR's Intelligence community portfolio is well positioned for growth also with both national and military Intel budgets up significantly. Moving on to the O&M wedge, there is good opportunity here as well, addressable by a Readiness and Sustainment business unit. Geopolitical tensions heighten the need for additional O&M spending and R&S, as you know, has a good position globally relative to O&M increases going forward, as well as unmatched capability in contingency operations for rapid and expeditionary support. The reconciliation bill provides $16 billion more in O&M for Army, Navy and the US Air Force sustainment. All customers and areas where KBR currently has strategic, portion and market share. Munition storage and transport are also key funding priorities for this administration and we will be pursuing opportunities here through our leading digital solutions for asset management, optimization and readiness. I also want to touch briefly on the outlook for the 2026 NASA budget, which is well aligned to our Science and Space business unit. Of course, the budget today is not yet final and any impact to KBR will be in 2026. While the presidential budget request saw a significant NASA budget cut, both the reconciliation bill and congressional appropriators aim to fund NASA closer to the full year 2025 in active levels. KBR's work is operational and core to NASA's primary mission. We fly the ISS, we perform space launches, spacecraft development and operations and we build the next generation of spacesuits and we prepare NASA and private astronauts for their missions and we fully expect these activities to be supported in the 2026 budget. Specifically, there is $10 billion in the budget reconciliation for NASA aimed at strengthening NASA's national security missions. While House and Senate committees are working to preserve funding for key science programs. This should provide support for our work on the Artemis program and our ongoing work supporting the ISS out of the Johnson Space Center. KBR has provided six decades of support to the moon and other space missions. While details are not clear on which science programs will be funded, it's good to see more support and our exposure here is not significant to the bottom line. Last but not least, we see future growth opportunities with commercial space and also with the necessary future expansion of the space launch infrastructure. Although not related to the US government budget, it's also important to note the international portfolio within the D&I business unit is also well positioned. Both the UK and Australian governments just came out of post-election strategic planning and are now moving to execute sovereign priority investments that KBR is well positioned to capitalize on, including space, maritime, missile defense and Intel domains. We support the AUKUS program, which remains a key component for Indo-Pacific deterrence and continues to get strong bipartisan support. We have also just completed a small acquisition, taking us strategically into the classified market in the UK called Infrastar. On to slide 10. We have intentionally positioned the company effectively to capitalize on these priority funding areas of advanced defense technologies, military space superiority, digital engineering, intelligence and mission cyber security. In line with this strategic focus, I would like to outline the key objectives for MTS to capture these opportunities, bringing advanced capabilities to the warfighter and in turn further drive top line growth and drive margin expansion. We will strategically realign resources and investment to capture new priority areas, particularly those incrementally funded by the Reconciliation Act. We are accelerating model-based systems engineering and AI solutions to a broader set of government customers. So for example, KBR developed a digital test environment where we're accelerating the development and testing activities for the Air Force's collaborative combat aircraft program across six OEM contractors using cutting edge model-based system engineering platforms. This digital capability will reduce the development time from decades to just a few years, driving greater speed and lower cost of capability to the warfighter. There are many, many broader applications for this type of digital capability and it can be applied to most weapon systems. In another example, we're using a digital lab in Huntsville, Alabama to assess digital maturity for Army Command and Control challenges across integrated missile defense, ground vehicles, aviation platforms and sensors. This work includes moving away from traditional manual methods and creating innovative digital environments that provide faster data, driven insights to the customer for improved design effectiveness and speed. We're also strengthening government relations to communicate our agile capabilities to shape new opportunities, tap existing contract vehicles and leverage KBR's broader commercial acumen. We're also expanding our presence in high margin international markets and continue to add scale through a unique combination of technical consulting and program delivery. And a good example of this is leveraging phasor-NAS consulting engagement across the whole nuclear ecosystem. And fifth, we are driving operational excellence to enable increased investment and growth. And this will include further enhancing shared services and digital enablement for our support functions. We welcome the administration's sense of urgency to accelerate digital and commercial solutions to improve national security effectiveness, which aligns to our own business profile and our strategy. With this, I will now hand over to Mark.