KBR, Inc.

Hello everyone and a warm welcome to KBR Inc's Q2 2022 earnings conference call. My name is Melissa and I'll be your moderator. If you would like to ask a question following today's presentation, you can do so by pressing star followed by one on your telephone keypads. I now have the pleasure of handing over to our host, Alison Vasquez, Vice President of Investor Relations to begin. Alison, over to you.

Thank you, Melissa. Good day from the UK and welcome to KBR's second quarter 2022 earnings call. Joining me 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 and then open the call for your questions. Today's earnings presentation is available on our investor section of our website at kbr.com. This discussion includes forward-looking statements reflecting KVR'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, also available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors, A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our presentation. I will now turn the call over to Stuart.

Thanks, Alison, and thank you all for joining us today. I will start on slide five. As you know, we always kick off with a zero harm ESG focus, and today I want to spend a moment on our expanding partnership with MURA. placing KBR at the center of enabling a global circular plastics economy. So really exciting. In June, we committed to invest an additional $100 million in MURA technology, which allows us to participate more fully in this sustainably focused high-growth advanced recycling sector with a global pioneer of advanced plastics recycling. MURA's mission is to enable a plastic-neutral future by providing an end-to-end solution to convert a wide range of mixed plastic waste, much of which would be destined for landfill today, back into high-quality chemical feedstocks. Targeting a million tons of annual capacity in operation or development by 2025, Mura licenses its technology through KBR to a global client base and is also developing its own pipeline of global operations. Our investment builds on the alliance we entered into last year to be Mura's exclusive technology licensing partner. Now, we have a very collaborative relationship. This is actually a really, really great team. And I've already produced numerous advances in the process technology, such as loop power, water recycling, modularization, as you'd expect, and digital operating solutions. And together, we have already licensed approximately 170,000 tons of capacity to some of the world's largest chemicals companies. So, great momentum. Now, under an expanded partnership agreement, KBR will also be the preferred services provider for Moore-led projects to support project management, engineering, integration, etc. So, really adding values, bringing key skill sets from KBR. Now, just last week, MURA made a big announcement with Dow to develop multiple world-scale advanced recycling facilities in the US and in Europe, collectively adding up to 600,000 tons of capacity. Dow will play an important role as a key off-taker of the circular feed that MURA produces. Now, this announcement is a huge endorsement of the technology and actually represents Dow's largest commitment to date to advance at scale recycling capabilities. This is just the beginning of what KBR and MURA can accomplish together. So we're very excited by this development. Now onto slide six and some key takeaways from the quarter. Now, before I get started, remember in Q1, we started pretty hot, we outperformed and we raised the guidance. Now, this was another excellent quarter for KBR, both from a delivery perspective and a future earnings potential perspective. The business is firing on all cylinders. Now, that's why we raised guidance last quarter and, again, why we continue to outperform this quarter. Our people delivered top to bottom with almost 20% adjusted EBITDA growth year on year. Now, in any market, At any time, this is exceptional. And even better, adjusted EPS growth of over 30%. And of course, and really importantly, cash generation and conversion was a highlight and was again bang on. Now, there were puts and takes, as you would expect, through the quarter, and Mark will give you some details on these, but an outstanding result all around. As expected, bookings in Q2 were absolutely terrific across both GS and STS, culminating in a group book-to-bill of 2.1x, a great performance. Now, I'll cover some of the key awards in a moment, but at a very high level, we continue to win the right work with the associated earnings profile to support our long-term targets and, importantly, our margin expansion expectations. A growing book of business underpins these targets, and we have built upon this position again this quarter. As you'll see later, margin performance was at or above expectation across all areas of business, a really terrific effort by the team. Now, this was helped a little bit by some early contract resolutions and asset sales that Mark will discuss in some detail, But even without these, margins were excellent. Also, in the quarter, we continued to reshape the portfolio. We divested a couple of non-core investments and then took that cash and invested in the circular economy in a meaningful way via Mura and added key digital transformation skills and customers with the Veeam acquisition in the UK, which we will touch on shortly. Now onto slide seven. The outlook for government solutions has been, remains, and is arguably increasingly positive for KBR. To touch on briefly the proposed full year 2023 defense budgets, early days, but the President's proposed budget represents a 6% increase over 22 levels, and the House and Senate have each approved incremental increases of $37 billion and $45 billion, respectfully. Now, it's too soon to tell where this will all land, but I think all signs point north. Now, while the budget process remains in its fairly early stages, we're encouraged by sizable increases in areas where KBR is at scale across defense modernization, RDT&E, space, of course, Intel, cyber, and of course, log cap given the continued activities in Europe. The cadence of awards in the US and internationally accelerated through Q2, and I think this is reflected in our overall book to bill, but we expect that pace to continue and to continue to be elevated through September towards the end of the US government's fiscal year, as you're aware. Now, you'll have seen increased commitments from the US but importantly also from NATO in relation to supporting Ukraine across a wide range of activities. KBR not only supports the US and Europe, but has historically supported both UK and NATO, and we're starting to see the beginnings of task orders in this area. It's still early, and it's too early to tell where this will go, but clearly we are positioned to serve near and longer term missions. As highlighted on the slide, the strong bookings performance means GS now has almost 95% of the work it requires to deliver its 2022 numbers and, of course, a very overall healthy backlog. Now, we've highlighted some contract wins this quarter on the right to showcase RDT&E, DevSecOps, and other high-end capabilities. Awards across our defense and Intel business really, really picked up pace via contract vehicles like IACMAC that we've talked about previously this quarter. And our strategy to expand services to new clients and increase contract ceilings is playing out across the portfolio. A really, really great result by this astute capture team. As you know, we've already talked about this a little bit before, we won our largest re-compete of the year, which was for NASA. This is the Ground Systems and Mission Operations contract at Goddard. And this was announced separately at the end of Q1, but went into bookings this quarter. Now, this is a five-year contract worth up to $640 million. Now, I'd like to spend a moment on the NextGen X-EVA spacesuit program for human missions to Mars. Quite cool. This is a 10-year, $3.5 billion IDIQ contract, won by KBR as part of the Axiom space team, and is a great example of large commercial-like contracting mechanisms coming out of NASA today. And KBR's ability to contribute in the increasing convergence of government and commercial collaborations in the space domain. really, really playing on our strengths. Now, this program will leverage innovative commercial applications for data and technologies and in time transition into something that looks like a spacesuit as a service model with NASA as a key customer. Now, this new approach to spacewalk services encourages an emerging commercial market for a range of customers and also grants NASA the right to use the same technologies on future exploration program procurement, so quite ingenious. Today, we provide maintenance and support to NASA for its ongoing operational spacesuit program. We will continue to perform that work, so over the next several years, wins under the new spacesuit program will be incremental. The first task orders to be completed include development of the first demonstration outside the space station in low Earth orbit and for the Artemis lunar landing. So really, really exciting stuff. Now on to slide eight. We wanted to spend a bit of time showcasing our expanding GS international footprint. Now, as I've said before, we believe this part of our business is typically underappreciated, but we do think it's a clear differentiator. So we wanted to give it a bit of airtime today. I mean, some key data points we now have a really diverse workforce of circa 5,000 people across 35 different locations with annual revenues of over a billion dollars. This is a very, very high-end workforce that has been built both organically and acquisitively, kind of similar to a US transformation. The timeline on the slide shows the quality of assets and people that have come into KBR over this period. Our capabilities in this portfolio include strategic advisory, high-end consulting, digital transformation, systems engineering, security and resilience, data science, renewable energy, and much more. The business has very, very healthy CAGRs at 10%, as shown here, and very, very attractive EBITDA margins in the teens, and it's been performing at that level for quite a time. Now, to reflect the differentiation and the importance of GS International, we've actually strengthened our executive team by bringing on Paul Kan. Now, Paul recently joined our executive ranks and reports to me as we look to further grow and strengthen this part of the business. Paul has a great depth of leadership and executive credentials, previously worked for Thales, he was the CEO of Airbus UK, and your senior executive at Cobham. So I'm very excited to welcome Paul to the team and I think it reinforces our commitment to GS International. Now more to come on this with obviously the addition of Veeam and increased alignment between the UK, the US and Australia. And I think AUKUS would be a good example of that. And that's a program we're already engaged on via Fraser Nash. So good things coming there. So onto slide nine. Now, with the COVID restrictions lifted in many, many countries, I recently went to the Middle East and got back recently. And obviously, I've been visiting other customers, a long-term IOC and sort of top chemical customers. And I'm absolutely enthused about the STS market outlook more than ever. And our delivery performance there and thus our reputation has been really, really strong. Now, at the forefront of our clients' thinking are things like, and this will not be a surprise, energy security, obviously heightened by the Russia-Ukraine war, gas and ammonia as a transition fuel, particularly for energy, a lot of investment, and I'll talk about future investment in hydrogen, both blue and green, and of course, opportunities in the secular economy. Now, all of these priorities are a backdrop backdrop to the long-term supply-demand imbalance driving investment decisions right now. The demand for our high-end services, our decarbonization capability, and our technology portfolio are continually increasing and have been in truth for some time. Now, you may recall our book-to-bill in Q1 was strong. It was actually even stronger this quarter. STS now has circa 85% of its work under contract for 2022. and a very, very healthy overall backlog indeed. There are some key awards highlighted in the right-hand side. Awards in green ammonia and contracts like the Chardonnays project demonstrate continued momentum in sustainability, energy transition, and importantly, decarbonization of existing assets. We've talked about that for some time. Venture Global, announced FID on their Plaquemines project. Essentially, this is a copy of the Calcasieu PASS project, which is now producing LNG. And our role here is engineering, project management, integration, and commissioning support over the next three or four years. Now, this program is fully aligned with our stated risk profile, so no change there. We have a partner, a really good partner called Zachary, who is the majority partner in our joint venture. and they have construction responsibility. And the client itself is furnishing many pieces of the key equipment, including the liquefaction modules and a number of other packages. Now, as a minority partner in this jump venture, our profit will come through equity and earnings. Now onto slide 10 and some thoughts on STS and an important KBR margin accelerator. STS really, really is all about earnings growth and margin expansion. And I think with VG coming into the mix with a sizable equity and earnings story, that storyline is even more prominent going forward. You will recall that we restructured this business in 2020 during COVID, exiting all lump sum EPC projects and commoditized services, and we did just that. In 2021, it seems like a short time ago, yes, just in 21, we redoubled our strategy around sustainability as the business's foundation, formally reorganizing into sustainable technology solutions and set a very bold course to double this business's EBITDA to 300 million plus by 2025. Now, understandably, This was initially met with some degree of skepticism from investors, but I think you can all see that this team is absolutely delivered. Now, STS is on course to generate circa $200 million of EBITDA this year, and that represents almost 30%, 30% of KBR's annual profit. So it's a real, real sort of solid piece of our story. And it posted book-to-bill of 1.8x over the last 12 months. It is on track, it's actually in truth ahead of pace to deliver upper teens and into low 20s margins. And it continues to operate importantly with negative working capital. Now with strong end markets that are actually getting stronger, this business is set up to deliver where it counts most, earnings growth and cash. And I couldn't be more pleased with the evolution of this business and its accelerating earnings and margin profile. So really, really exciting times ahead for SDS. And now I will hand over to Mark. Mark.