KBR, Inc.

Hello, everyone, and welcome to the KBR Inc. Fourth Quarter 2022 Earnings Conference Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I'll now hand over to your host, Jamie Dubray, to begin. Jamie, please go ahead.

Thank you, Charlie. Good morning, and welcome to KBR's Fourth Quarter and Fiscal Year 2022 Earnings Call. Joining me are Stuart Brady, President and Chief Executive Officer, as well as Mark Sopp, Executive Vice President and Chief Financial Officer. Stuart and Mark will provide highlights from the year 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-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.

Thank you, Jamie, and thank you for taking the time to listen this morning. I will start on slide four. Now, you've seen this before, it's our zero harm pillars. And today, given it's year end, I would like to focus on health, safety and security, which is the button on the top right there, and really have a look at our performance in 2022, which we're going to do on slide five. So when it comes to HSSE, We focus a lot on leading indicators, things like visible leadership, interventions, courage to care conversations, task planning, and things like risk assessments. We believe this drives the right behavior in line with our people-centric values. The proof, however, that what we do on the front end is really working is, of course, what comes through on the back end, so the lagging indicators. Now, remember, we believe good safety is good business. And often there's a direct link between safety performance and mission and project delivery performance. So I'm thus pleased to report that in 22 we had one of, if not the strongest performances in our history with a total recordable incident rate of 0.079 and we achieved 91% zero harm days across all our projects, our sites, offices on a global basis. And these numbers include contractors and subcontractors under our responsibility, so quite a performance. Both of these lagging indicators are industry leading and are a direct result of the amazing performance of our people and our partners all over the world. This takes a laser focus day in, day out, 24-7, and I would publicly like to thank everyone involved. The team truly delivers. Now, we've highlighted some standout projects and programs, as well as some of the external awards we have received during the course of the year, from LogCat 5, to our Aspire program in the UK, to amazing performance and recognition in Saudi Arabia for sustainable technology, to what we do for NASA, and last but not least, the ongoing work in the European theater. High cadence, high pressure, changing scope and requirements, with exemplary safety performance. There are, of course, many, many more of these, but hopefully this gives you a sense of the global and cross-segment nature of the 22 performance. Now on to slide six. Now normally earnings, we talk about the quarters result. So in brief, we closed out the year exceptionally well, over-performing across all key metrics, a really strong finish, both operationally and fiscally. I thought, however, I would concentrate more on the overall health of the business in 2022 and how this positions KBR going into 2023, including confidence in our 25 targets. So let me start on people. The people of KBR do things that matter every single day. And I want, again, to thank them publicly for all that they do. What we say today would be really hollow without recognising this incredible team. That said, and as everyone is well aware, there is a real war on talent ongoing which really heightened through 2022. I think we managed through this pretty well and over the year we increased our headcount by 8%, which I think sets us up nicely going into 2023 especially when you consider that we also drive shareholder value through IP, proprietary equipment, and catalyst sales. As a testament to the progress we're making towards KBR being a talent magnet, and in so doing provide an employee experience that allows each and every person the opportunity to bring their whole selves to work, the feedback from the employees themselves was that 82% believe KBR is in fact a great place to work. During the year, we advanced our IND agenda across the board with both gender and ethnicity improvements, and we were recognized by Forbes as the world's top female-friendly company. Over and above, we've been externally recognized also as a great place to work in multiple countries across the world, which I think is a true reflection of our aligned values globally. We were also recognized by the Wall Street Journal as a best managed company, by Fortune Magazine as one of the world's most admired companies, and as most honored company by institutional investors. And we ranked at the top of the class amongst both mid-cap and overall sector peers. These accolades not only improve employee engagement, but also benefit retention, and I think our ability to recruit, which is the key point here. Now don't get me wrong, this is a journey that never ends. We're certainly not perfect, and we know there is more to do, but we're committed to a continual improvement and a people focus. On ESG, zero harm. I covered our safety performance earlier, so I won't repeat that. But impressively, and of course, as you would expect, 96% believe KBR is a safe place to work. Now that means that the They believe that we care and that we look after our people, which is really, really important to me and the team, both physically and mentally. Being a responsible company and an ESG leader is, for us, table stakes. But as you can see, the unique aspect of KBR is that we align our sustainability capability directly to shareholder value, and increasingly so, with circa 40% or 0% of our earnings derived from sustainable activities. And as you know, since 2019, we've been carbon neutral, and we're making good progress towards our operational net zero 2030 target. Now onto business growth on the bottom left. Annual book to build across the company was 1.2 times on a 12-month basis, and this delivered $8.2 billion of bookings and options, and really allows us to maintain momentum as we head into 23. You can see we've got strong backlog coverage. Importantly, an attractive pipeline that includes $10 billion submitted and awaiting award. Adjusted level set, that's up 10% from last year. And to be clear, HomeSafe is not included in bookings, nor in backlog, or in pipeline, given its scale to show an apples-to-apples comparison to what we've previously reported. Now, a key takeaway here is that we have over 70% of our work under contract to deliver on our 23 guidance, so really strong coverage. Onto financials, obviously Mark will cover these in detail, but throughout the year, quarter after quarter, we proved resilient, we grew revenue in line with our targets, We improved margins with strong operational performance and a strong STS market. EBITDA dollars XOEAW was up 18%. An amazing earnings performance. Cash performance was absolutely terrific. But importantly, there were no surprises. And we beat and raised guidance twice during 2022. KBR is a business with predictable growth attributes. technical differentiation, expanding margins, minimal concentration risk, a real differentiator, and is strategically positioned in well-funded markets. Now, we promised a balanced capital deployment strategy, and I believe we delivered on this by maintaining responsible leverage during periods of volatility in 22, while returning close to $270 million to shareholders. Now we have plans to up this in 2023 and beyond that Mark will cover later. Strong operational performance and fiscal management allowed us to meet and more than overcome interest rate and FX headwinds through the year, without which our IBT would have been circa $15 million higher. So again, a terrific performance by our people and our operations. Now on to slide seven. As we head into 2023, I wanted to spend a few moments expanding on our sustainable technology business. As you'll see in a few seconds, STS has grown above expectations, especially in earnings, as we talked about previously. And this is expected to continue into 2023 and beyond. And it's worth noting STS now represents almost 30%, 30% of KBR's group-adjusted EBITDA today. At the top level, we sell and deploy IP and sustainable services to growing markets across energy transition, energy security, climate change, and smart, affordable solutions. Now, the attractiveness of these markets And acceleration of our performance towards our long-term targets is worth exploring a bit further. So by the numbers, we'll meet our 2025 STS target in 23. Back at our investor day in 2021, we said we'd double our EBITDA by 2025, hitting circa US dollars 300 million. So we're well ahead of pace. So what's driving this? Demand for IP has increased not just for hydrogen and ammonia, but for plastics recycling, for olefins due to clients wanting to diversify and optimize their product streams, green refining solutions, lithium extraction for EV batteries, et cetera. The solutions desired are moving from traditional gray to blue and ultimately to green. Our pipeline is very strong across a wide portfolio of technologies. I realize that ammonia to hydrogen is super exciting, but I want to reiterate this acceleration is multifaceted. Now on ammonia and hydrogen itself, the uptick in our pipeline for blue ammonia, so think traditional gray with renewable energy or carbon sequestration in combination, for example, has increased significantly. And I recently visited Japan, and their commitment to coal-firing ammonia in their coal-fired power stations is clear, which will drive significant medium-term demand. Ammonia cracking, so converting ammonia back into hydrogen, is also an exciting opportunity in its own right, but it will again further drive medium-term ammonia demand. So really exciting. Also this year, I've traveled through the Middle East, and I mean, their publicly announced capital spending programs through to 2030 is enormous, well in the trillions. And without fail, the various countries are committed to doing this with a green and decarbonization thematic in all that they do. So think world-scale blue ammonia, gas to power to stop the burning of crude, crude to chemicals to increase product optimization, renewable power, significant CO2 sequestration, and not to mention things like sustainable cities, et cetera. As you're aware, we've had a really strong presence in the Middle East for decades, and we're seen as a key partner there. As a reference point, our revenue from SDS alone in the Middle East grew 26% in 2022 alone. Now, you've seen this. Blue Chip clients have recently announced significant returns across the globe, which of course facilitates increased spending for the improvement and decarbonization of existing assets as they look to shore up energy supply and thus security. Plus, of course, they have their plans associated with their ESG story and energy transition, hydrogen, et cetera. The demand for our sustainable services has increased as a consequence in the level of synergy between our sustainable IP offering and our sustainable services is significant, as we've shown here by the intersecting circles. A good example of this would be MURA, our plastics recycling technology, where we obviously sell the hydro PRT IP, but in addition, we assist across the delivery spectrum from modularization, balance of plant engineering, program and control management, commissioning support, et cetera. Our view is that in the medium term, the size of these two will continue to be very similar, so think a 50-50 split, and of course, be increasingly symbiotic. So on to slide eight. You can see how this business has really taken off since we restructured and launched sustainable technology solutions. They outperformed in 2021 and again in 2022. And as I said earlier, we will meet our 2025 target in 2023, two years ahead of pace with ongoing growth and earnings momentum through to 2025 and beyond. Now, clearly, we're feeling really good about the 23 number, but of course, this allows us to firm up even more behind a 2025 adjusted EPS target. As I said earlier, SDS was close to 30% of KBR's earnings in 22. This will be closer to 36% in 2023. We've always said our focus was on quality of earnings, and this is a great example. Now, before we turn to the next slide, I just wanted to talk about government solutions for a few seconds. There has been little change in the market, so no real update here, and hence no slide. But it's important, I think, to reiterate the following that are more particular to KBR. Our international business, particularly across the consulting advisory area in the UK and in Australia, is looking at double-digit growth as we go forward. And GS International is now circa 20% of KBR's earnings as we move into 2023. The up-tempo in Europe for a GSUS R&S business has not slowed in the slightest, and this is set to continue again as we move into 2023. Also in the US, long-term RDT&E budgets relevant and accessible to KBR are up double digits. So key markets within this, like Space Force, are growing faster, which is being reflected in our ongoing growth. Also, this has a direct impact to the broader defence and intel segment, which grew nicely in 22 and is expected to do so again in 23 and beyond. National security, as I'm sure we've all seen in the recent foreign objects being shot down above the US and Canada, is ever more critical and, of course, in focus. The home safe transition is going very well with strong alignment with our customer. And ramp up, as you're aware, is expected through 2024 and 2025. Civil space awards will catch up, we believe, in 2023. And new contracts like the spacesuit contract and program will continue to gather momentum as we move forward. So in short, GS is on pace and aligned with our 2025 targets. We have multiple pathways for growth across the GSUS landscape and internationally. And of course, the increased cooperation via AUKUS between the US, the UK and Australia will also gather momentum through 2023 as we look to security in the Pacific. So let's turn to slide nine. Today, we've given you more detail on sustainable technology. And we're excited, we are well ahead of pace. We've also highlighted multiple routes to success across our GS portfolio and combined with STS, you can really see the resilience, but also the excitement we feel for KBS future. We have performed 2022 to overcome, and actually a bit more, the headwinds of inflation, increased industry expense, and FX. And we've set ourselves to continue to do so, so no excuses. I'm thus delighted to reaffirm our adjusted EPS 2025 target of $4.75. We are ever more confident of achieving this target. Now, I'm sure there'll be some moving parts with EBITDA directionally up, which of course is terrific, as you've seen with STS's performance. But things like interest expense, et cetera, are also offsetting what you would expect. Now, previously, we gave you the work under contract to achieve our 2025 target, and using the same basis of calculation, this now sits at over 70%, so hence our increasing confidence also. Our cash performance continues to be really strong, so absolutely no change there. We deployed more to shareholders in 2022 than ever before, and Mark will cover in more detail our plans to do more. Now, speaking of Mark, now would be an ideal time to hand over, and Mark will run you through the year in a bit more detail. He'll cover, of course, capital deployment and conclude with our 23 guide.