KBR, Inc.

Good day and welcome to the KBOR third quarter 2020 earnings conference call. This call is being recorded. As a reminder, your lines will be in the listen only mode for the duration of the call. There will be a question and answer session immediately following prepared remarks. You will receive instructions at that time. For the opening remarks and the introductions, I would now like to turn the conference over to Alison Vasquez. Please go ahead.

Thank you. Good morning, and thank you for attending KBR's third quarter 2020 earnings call. Joining us today are Stuart Brady, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the quarter, a market update, and present our updated guidance. After these remarks, we will open the call for questions. Today's earnings presentation is available on the investor section of our website at KBR.com. I would like to remind the audience that this discussion may include 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 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 10K, available on our website. I will now turn the call over to Stuart.

Thank you, Alison, for another perfect lead-in. And thank you all for joining us this morning. I would like to start on slide four. You have seen our sustainability platform before, so nothing new here. This has now been rolled out globally under our expanded zero harm courage to care branding. And I'm very pleased to report that the take up across the organization has been way above expectation, huge enthusiasm. At KBR, we kick off every meeting with a zero harm moment that focuses in on one of the 10 pillars. And this really allows our people right across the organization to promote and educate others on what they are particularly passionate about or what is directly relevant to them and their business today. So from an ESG perspective, this has really facilitated a cultural shift with Turing KBR towards a far more aware, responsible, and sustainable company, which takes us nicely onto slide five. really covering mental health and fitness. I mean, this is a really important topic today, as I'm sure you're all aware, particularly with COVID-19 and the associated potential isolation. I guess the different pressures that this creates for some, perhaps working from home with homeschooling, people are experiencing some burnout, etc., which, of course, can increase the general anxiety and, of course, stress levels. So KBR, we formed a Global Mental Health and Wellbeing Task Force. This is led by Jenny Miles, our Chief People Officer, to ensure our people are supported in these uncertain times. As you can see, our strategy focuses on creating a positive culture and equipping our people with the knowledge and, of course, the awareness and the resources to ensure that together we're all focused on both mental and physical fitness. Personally, I really like thinking about mental fitness, similar in a way we think about physical fitness. You know, there are times when we all feel fitter and times when we all feel less fit. And I think this approach really destigmatizes mental health in that we're all on the curve and our objective is to improve mental fitness, much like we typically want to improve our physical fitness. We're also lucky at KBR because we have some really strong in-house capability. And a couple of weeks ago, our people organized a global town hall with experts from our POTIV program to talk about the work they do to support mental health and fitness for the U.S. Special Forces. And they shared practical tips and advice, of course, on ways each of us can also maintain a healthy balance. And it was really rewarding to see the level of engagement across the globe for our leading health and fitness experts to add value internally, as well as the great work they do externally. Onto slide six. We're going to start with some third quarter key takeaways. KBR continues to prove resilient in these volatile and difficult times. Our strategy of moving upmarket into higher end offerings is really paying off. The growth and momentum in our space, human health performance, technology, science and cyber, and high-end technical defense engineering businesses is clearly evident in the quarter, which also aligns well, of course, with the introduction of Centauri to the KBR family. And I would like to formally welcome our new colleagues as we close that deal on the 1st of October. Our people do an absolutely amazing job, and they truly deliver operational and execution excellence. The commitment to the WIC mission is unwavering. And from a numbers perspective, this, I think, is reflected in the margins. And without exception, this quarter, all segments met or exceeded EBITDA margin targets, a terrific result. Earnings and cash were once again strong. We have great momentum across the business and the robust book-to-bill, particularly in GS and TS, will help ensure this momentum and our resilience continues. Our year-to-date performance, combined with the closing of Centauri on the 1st of October, allows us to raise EPS guidance. And once again, our teams across the world knocked it out of the park on cash, so we'll also be increasing our cash flow guidance. More on this later from Mark. Coming out of the gate in Q4, post-funding Centauri, our leverage is kind of at the bottom of our range, and thus our balance sheet strength combined with our attractive risk profile and our solid book of business, of course, gives us deployable optionality. Now onto slide seven. This is our strategic model. It's the same one we presented at our investor date in May 2019. It seems a long, long time ago now, especially with all that's happened this year. So we felt it might be useful just to refresh people's memories. In short, our people are at the centre of all we do and who we are. The quality of talent and the culture of collaboration, team ethos and mission focus is very powerful and hugely uplifting. Our people do things that matter and they care. Our core business remains robust, as you've seen, and resilient. And we have attractive long-term contracts and strong domain expertise in solid areas of the market that really help ensure that this will continue. Our breakout growth factors and strategic themes remain intact. I think this is important as strategic discipline is essential in volatile times. When we presented the Centauri acquisition, the strategic fit and alignment to defense modernization and space superiority should have been clear. We continue to move up market and our future focused on attractive and well-funded end markets. I will not read all the bullets, but the takeaway here is that our strategy remains valid and we are executing that strategy. As you can see from the wheel, the balance across our areas of focus is absolutely terrific giving access to multiple funding streams and customers across the globe and our customer base today is around 80 percent government and 20 percent commercial the risk profile across our business is consistent and it really delivers more predictable learnings and of course excellent cash conversion as we have demonstrated We are well positioned and continue to secure work in attractive end markets that support continued growth. So let's now have a look at the market drivers in our key end markets. So on to slide eight. So we'll start off with space and mission solutions. The growth in this segment year on year has absolutely been terrific. We've seen attractive on-contract growth as existing programs perform well across both NASA and DoD. As you can see on the right, we continue to win contracts to perform high-end IT and data analytics solutions. Space and Mission Solutions is about a billion-dollar revenue business, and thus having a backlog of 2.3 billion sets us up well for the next few years. From a market outlook perspective, much like we saw in the cyber domain, we continue to see greater collaboration across space. Our position within NASA and our presence via Centauri in military space and intelligence aligns well. Our human health and performance contracts for NASA and the special forces fits within this business, and this we believe is also a strategic growth factor for KBR going forward. On to slide nine, defense systems engineering. Again, double-digit growth year on year, a brilliant book to build in the quarter, and all in really high-end technical areas. You can see on the right a few highlights, R&D on next-gen electronics, systems engineering for unmanned naval warfare, and R&D for missile systems. This is high-end work for emerging defense modernization needs. As we've explained before, this is a business that thrives on IDIQ contracts via customer intimacy. Lots of smaller scale but limited competition pursuits and projects. Very few protests as a consequence. The annual revenue is again about a billion dollars and the backlog of $2.1 billion again sets us up well going forward. From an outlook perspective, the near-peer threats are not going away and are arguably increasing. We are lined up well opposite national security priorities, and this is enhanced, of course, with the introduction of Centauri. To be clear, the numbers and the contract wins, et cetera, on this slide are only for our existing defense system engineering business and do not yet reflect Centauri. Onto slide 10, logistics. This, I think, is our least well-understood business area within KBR. The investment community has a tendency to relate what we do here holistically to what KBR was doing back many years ago in the Iraq war days. The shape of this business is very, very different today. The focus is very much on recurring readiness and sustainment activities funded by O&M budgets. Through this, we have seen a major reduction of business mix funded by OCO. Our book to bill in the quarter of 1.4 was very, very pleasing and supports continued momentum in the readiness and sustainment areas. And our recent UA boss win is not yet reflected in the backlog. You can see this on the right-hand side, modernizing and upgrading automated fuel handling systems, increasing the volume as we transition onto NORFCOM. Both of these are all about readiness, training, et cetera. The long-term contracts in Saudi, Europe, and Djibouti are focused on smart, digitally-enabled, sustaining activities. The outlook for KBR is far more predictable as we have transitioned to more O&M funding streams. The complexity has increased, which suits our capabilities with the changing supply chain environment and the demand for more efficiency and predictability via more digitalization. Trip levels have and could likely continue to reduce in the Middle East, which impacts, of course, our level of effort. But our proportional exposure to this has reduced significantly, as highlighted earlier. Also, the margins associated with this business are in line with our overall outlook and not at the low end, as you may presume. The revenue of this business for KBR is just over a billion dollars. And again, the backlog and strong bookings sets us up very well for the future. Onto slide 11. Our international GS business is a clear differentiator and is just under a billion dollars in revenue. As you're aware, the business is underpinned by sizeable, very long-term, high-performing PFI contracts, which is reflected in the backlog. A very strong, predictable and resilient business, which I think is particularly important as the UK manages through not only the challenges of COVID, but also Brexit. In Australia, defence betting has actually been increased in recent times as the Australian government looked to advance economic recovery while modernising their defence forces. In Australia, our business is at the forefront of software development and implementation for mission planning, virtual and augmented reality, sustainment, systems engineering and naval training. As you can see, the growth year on year in Australia has been very impressive, and recent wins on the right set us up nicely as we move into next year. Now onto slide 12. With our announced exit from lump sum EPC, including direct higher construction, and our exit from low margin commoditized services, we will concentrate today on the realigned technology solutions. As we stated previously, we forecast this business to be circa $1 billion in revenue in 2021, with an overall margin in the mid-teens. And we reaffirmed that again today. As you'll see in a moment when Mark takes over, the heritage IP technology area of this segment continues to deliver amazingly strong margins in the quarter and had a book-to-bill of 1.3%. With this positive booking momentum, margin performance, and a combined backlog of $1.9 billion, we feel increasingly positive about our strategic shift and realignment to more higher-end technology-enabled services. We're also well advanced in removing significant overhead costs. From a market perspective, the drive to lower emissions, product diversification, energy efficiency, and more sustainable technologies and solutions is clear. The demand for our technologies across ammonia for food productions, olefins for non-single-use plastics, and in refining for product diversification and more green solutions to meet tighter environmental standards continues. A strategic shift into IP-enabled maintenance is also gaining traction, and we continue to see increasing activity across our advisory portfolio, particularly in energy transition. And we've highlighted some recent successes on the right to demonstrate this. On to slide 13. In summary, these market dynamics culminate in a very, very healthy pipeline for KBR. with significant pursuits distributed across our portfolio. As I've mentioned previously, 2020 and 2021 are low-recompete years, enabling increased focus on winning new business, and the team is absolutely laser-focused on this objective. We have almost $20 billion in pursuits that will be awarded over the next six to 12 months. I mean, this is sort of three times annual revenue run rate, a very healthy metric indeed. And this excludes Centauri, which we'll add in the fourth quarter. So in short, it's all good. So I will now hand over to Mark, who will walk you through the numbers in a little bit more detail.