KBR, Inc.

Good day and welcome to the KBR Incorporate fourth quarter 2020 earnings conference call. This conference has been recorded. As a reminder, your lines will be in a 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 opening remarks and introductions, I would now like to turn the call over to Alison Vasquez, VP of Investor Relations. Please go ahead.

Good morning, and thank you for attending KBR's fourth quarter and fiscal 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 a recap of the year, a market update, and will outline our 2021 guidance. After these remarks, we will open the call for your 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 the company's 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, and thank you all for joining us today. I will start on slide four. And I'll start, as always, with a sustainability moment. With the maturing of our ESG processes and our program in general, we are now able to measure our carbon footprint across our global operations, including air travel. This in turn allowed us to achieve carbon neutrality in 2019 and set in motion a continual improvement program towards achieving a net zero target by 2030. Sustainability at KBR means more, however, than just behaving as a good, responsible corporate citizen, as critical as this is. We also have IP, technology, and deep expertise that we can and are deploying for our customers across the globe. helping them decarbonize, move towards a hydrogen economy, become more energy efficient, et cetera, really enabling our customers to meet their own sustainability goals and commitments. A recent announcement on the MURA plastics recycling technology is another great example of a solution we license that enables a circular economy and continues KBR's value-add journey, both to sustainability and for our stakeholders. We believe Moora's technology is a banger and I would encourage you to read our recent releases if you've not seen them. This is one of the reasons we are changing the name of this business area to Sustainable Technology Solutions. Our ESG goals have been and will continue to be part of our exec comp program. I would also direct you to our website where our latest sustainability report was published in December 2020. This takes us nicely onto slide five. 2020 was an incredible year. We did not allow this dreadful virus to halt our strategic process. Arguably, we leant forward and moved faster. We completed the Centauri acquisition, moving us into Intel and military space at scale. Our science and space business and defense and Intel businesses organically grew above market, and the international business performed brilliantly. And importantly, we increased our backlog and our long-term contract base. Our early move out of commoditized energy and our focus on sustainable technology has proven to be excellent timing. The excitement and increasing market activity across our technology portfolio is reflected in the high level of licensed work driving margins up and the growth in backlog with three sequential quarters of strong book-to-bill. As I've said already, we've also added to our technology portfolio with the addition of Mura. and with ammonia gathering real momentum as the hydrogen fuel transport, a sustainable technology portfolio is very well positioned in high growth areas. We also opportunistically repurchased shares in Q4 when we felt our value was significantly misunderstood. As I said, 2020 was a remarkable year and one that proved that our business model is both resilient and cash generative. The numbers speak for themselves, and of course, Mark will give more detail below the group result in a moment. One of the several key takeaways today is that we grew in areas we were really, really targeting. It's good for KBR, and it's good for our stakeholders. This is in higher-end and technically differentiated businesses, double-digit growth in both science and space and defense and intel. Our book to bill has gathered momentum through the year and closes at 1.2 for government solutions and 1.4 for tech, mostly in the area of sustainable technology as it relates to tech, which we all know is a very, very hot market. So off the back of a strong 2020, positive bookings, and favorable market fundamentals, we are pleased to announce formal guidance for 2021, which is underpinned by more than 70% of work under contract today and has greater than 20% EPS growth at the midpoint. We will now give you some color on the market outlook across our business segments that will culminate on our pipeline data. So onto slide six. So we'll start with defense and intel. Strategically, we are lined up opposite national security and defense modernization priorities. I will not read out all the words on the slides as you've seen these before, but I will reiterate that there is continued strong support for investment in these critical areas. With 23% growth in 2020, the introduction of Centauri, and an overall book to bill of 1.3, which importantly also increased our average contract tenure, this all lines up well for continued growth, not only in 2021, but beyond. Some key wins are shown on the right-hand side in the areas of rapid prototyping, R&D, operationalizing national space capabilities, which should give you a good sense of the high-end capability that now sits within KBR. A recent announcement of 10-cap reinforces this and shows the value that Centauri brings to KBR. On to slide seven. Science and space. Strong growth in 2020, all organic and mostly on contract growth across NASA and in the human health performance areas. This is a direct reflection of execution excellence and the value add our people bring. The market outlook for space in particular is starting to be a little clearer. There is strong momentum behind closer cooperation between NASA, Space Force, and the Intel community. A recognition that these agencies are stronger together and that collaboration will drive faster progress, more innovative solutions, and better value. Having a footprint at scale across these three important constituents, military, intel, and civil, positions KBR nicely, especially with deep domain knowledge in areas like space domain awareness, launch support, et cetera, and of course our position in R&D. These dynamics further affirm our space superiority strategy. On the civil side, the new administration looks to be supportive of Artemis, albeit with a longer schedule. And although KBR's exposure is non-material, directionally this bears well, especially given our position in human spaceflight and in health and human performance. We also expect to see a greater emphasis on agencies that support the climate change agenda of the Biden administration, agencies like NOAA and USGS. You can see from the recently announced recompete win for USGS on the right that KBR is well positioned to take advantage of such opportunities. Our operational focus and domain expertise gives us a very stable foundation and with low re-competes in 2021 and a very active pursuit pipeline, the opportunity for continued momentum is clear. It's also worth mentioning, although still not at material levels, there is increasing engagement with commercial space and especially as they start to put humans into their missions, which we view firmly as a growing strategic opportunity. Onto slide eight, readiness and sustainment. We have renamed our logistics business to better reflect what it actually does today. We have repositioned this business towards O&M funding, and this is a key message of today. This business did have some headwinds coming into 2020. In 2019, you'll recall, we had disaster relief revenue from Tyndall, Tyndall Air Force Base, And as we have said, decreasing OCO-funded revenue in the Middle East. And this was largely replaced with increasing work on NORTHCOM, which is focused on supporting training and readiness and sustainment. In addition, we landed a few new sustaining programs overseas during 2020, expanding our existing footprint. Our base operational support work across the world, again, sustainment and O&M, performed exceptionally well with increasing digitalization and automation to drive efficiency. And this, we think, will continue into 2021 and beyond. The work we do on pre-positioned stock also delivered exceptionally well, both for the Marines and the Army, again, focused on readiness. and again leveraging highly digital smart solutions to plan, schedule, and maintain these critical assets. We have moved quickly to adopt highly agile supply chains due to COVID and other factors. Our global presence and digitalization helping us deliver, and again, this will continue to evolve. Not only is the fact that the volatility risk around the business is now reduced to less than material levels, this is a key message, but in addition, quarter-on-quarter growth through 2020 has created significant momentum in this business. Together with a book-to-bill of 1.3 for the year and recently announced sizable wins at year-end, which we have highlighted on the right, Readiness and sustainment is very well positioned going into 2021 and beyond. On to slide nine. International. This is more of a mixed bag. Our growth in Australia has been nothing short of sensational. It has mostly come via organic growth and a bit from one modest acquisition in the naval training area in 2020. Increasing spending and greater scale in Australia sees us enter 2021 with above-enormative growth expectation, especially in higher-end technical areas where we have strong domain expertise. Areas like mission planning IT, augmented reality training, defense infrastructure, and specialist lifecycle support is highlighted in the recent wins on the right. Our UK business, which you're well aware, is underpinned by sizable base operational and maintenance contracts with long tenures. These mitigate volatility in the UK because we see the UK moving a little bit slower. That said, there will be increased funding into areas like cyber, space, and intel due to the decoupling from Europe. Now on to slide 10. Sustainable technology. We have presented a few times recently on a sustainable technology portfolio, the associate market, and the immense opportunity. We have described in greater detail what sits within the new sustainable technology solutions business. We have given you a standalone outlook for this business in 21 of just over a billion dollars with margins in the mid-teens. From this base, we also laid out the path to doubling EBITDA by 2025. I'll say that again, doubling EBITDA by 2025. And back this up with three quarters of very strong book-to-bill, strong margin performance, and demonstrated cost reductions in 2020 as we exited legacy energy. Our backlog supports the forward momentum of this business, and our technology portfolio aligns well with what are really hot market fundamentals. The demand for ammonia for coal-firing coal-fired power stations and as a hydrogen transport fuel being perfect examples. Further, we have recently announced continued growth in our portfolio with the introduction of Moora's plastic recycling technology. Climate change, decarbonization of existing assets, moving to a hydrogen economy, circular economy solutions are all real and not going away. KBR has significant IP and know-how that really differentiates us going forward, and we see growth in revenue and in margins happening concurrently beyond 2021. On to slide 11. In summary, our pipeline, some key facts on the right before talking overall value numbers. It is a fact that our re-compete win rate is 95% again, driven by exceptional execution and the commitment of our people. It is also a fact that 2021 is a low re-compete year for KBR, including Centauri. Thus, it is logical to assume that most of the near-term pipeline opportunities are additive. It is also a fact that in 2020, the backlog in government, including Centauri, and in technology grew 20% and 22% respectively, underpinning continued momentum and extending contract tenure well beyond 2021. It is also a fact that the value of pursuits in the proposal negotiation phase of our pipeline is over double our current annual revenue. And it's also a fact there are a number of pursuits in the pipeline that are in excess of a billion dollars each. But we've also got a healthy mix of over 150 different pursuits which are greater than $100 million, balanced nicely across our businesses. So in short, we are very well positioned not just for 2021, but beyond. I will now hand over to Mark to cover the numbers in a bit more detail, touch on capital deployment, and of course, finish up with our 2021 guidance in detail. Mark.