Q3 2020 KBR Inc Earnings Call

[music].

Good day, ladies and gentlemen, you on hold for today's conference call, where we see new arrival of additional participants somewhat construction. Shortly thank you for your patience and please continue to hold.

[music].

Good day and welcome to the KB Award Thirdquarter Twentytwenty earnings Conference call. This call is being recorded as a reminder, your lines will be in 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.

Opening remarks, Andy 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 <unk> third quarter Twentytwenty earnings call.

Joining us today are Stuart Bradie, President and Chief Executive Officer, and Mark Sopp, Executive Vice President and Chief Financial Officer George.

Jordan Mark will provide highlights from the quarter, a market update and present, our updated guidance after.

After these remarks, we will open the call for questions.

Todays earnings presentation is available on the Investor section of our website at KBR Dot com.

And this really allows our people right across the organization to promote and educate others, what they are particularly passionate about.

Okay, but is directly relevant to them on their business today.

So from an S.G. perspective, this is really facilitated a cultural shift maturing KBR towards a far more aware responsible and sustainable company, which takes us nicely onto slide five really covering mental health and fitness I.

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. The this creates for some perhaps working from home with home schooling.

People are experiencing some burnout et cetera, which of course can increase the general anxiety and of course stress levels.

So KBR reformed global mental health and well being task force.

This is led by Jennie Myles, 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.

Passionately I really like thinking about mental fitness similar in a way, we think about physical fitness.

There are times, when we all feel fitter and Tyson, we all feel less fit and I think this approach really de Stigmatises mental health and 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.

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.

Endings and cash for once again strong.

We have great momentum across the business on the robust book to Bill, particularly in GBS on Ts will help ensure this momentum and our resilience continues.

Our year to date performance combined with a closing all centauri on the first of October allows us to raise EPS guidance and once again, our teams across the world knocked out of the park on cash. So we'll also be increasing our cash flow guidance for on this later from Mark.

Coming out of the gate in Q4 post fundings and tare, 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 on to slide seven.

This is our strategic model. It's the same one we presented at our Investor day in May 2019.

Seems a long long time ago, and I are especially with all this happened. This year. So we felt it might be useful just to refresh people's memories.

In short our people at at the center of all we do and who we are.

The quality of talent on the culture of collaboration teaming with US and mission focus is very powerful.

Hugely uplifting ARPU.

Our people do things that matter and the care.

Our core business remains robust as you've seen and resilient.

And we have attractive long term contracts and strong domain expertise and solid areas of the market that really help that this will ensure that this will continue.

Our breakout growth factors and strategic themes remain intact.

I think this is important strategic discipline is essential and volatile times.

When we presented this and tare acquisition, the strategic fit and alignment to defense modernization in 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 field the balance across our areas of focus is absolutely terrific.

Having access to multiple fundings teams and customers across the globe and our customer base today is around 80% government and 20% commercial.

The risk profile across our business is consistent.

And that really delivers more predictable earnings and of course excellent cash conversion as we have demonstrated we.

We are well positioned and continued to secure work in attractive end markets to support continued growth.

So lets now have a look at the market drivers and our key end markets so onto slide eight.

So, let's start off with space and mission solutions.

The growth in this segment year on year has absolutely been terrific weve seen attractive on contract growth as existing programs performed well across both NASA on deals.

As you can see on the right. We continue to win contracts to perform high end IP 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.

A human health and performance contract for NASA and the special forces fits within this business unless we believe there is also a strategic growth factor for KBR going forward.

Onto slide nine.

Defense systems engineering spend.

Again double digit growth year on year, a brilliant book to bill in the quarter.

And all and really high end technical areas.

You can see on the right a few highlights R&D on Nexgen electronics.

Systems engineering for unmanned naval warfare, and R&D for missile systems.

This is high end work for a margin defense modernization needs.

As Weve explained before this is a business that thrives on IDI Q contracts.

Customer intimacy lots.

Lots of smaller scale, but limited competition pursuits on projects.

Very few protests as a consequence.

The annual revenue as 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 have lined out while opposite national security priorities and that this is enhanced of course with the introduction of Centauri.

To be clear the numbers on the contract wins et cetera. On this slide are only for our existing defense system engineering business and do not yet reflect suntory.

Onto slide 10 logistics. This I think is our least well understood business area within KBR the.

The investment community has a tendency to really 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 on end budgets.

Through this we have seen a major reduction of business mix funded by our CEO.

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 you a boss when is not yet reflected in the backlog.

You can see that on the right hand side, modernizing and upgrading automated fuel handling systems increase.

Increasing the volume as we transition onto north call. Both of these are all about readiness training et cetera.

The long term contracts in Saudi Europe on Super duty I focused on smart digitally enabled sustaining activities.

The outlook for KBR is far more predictable as we have transitioned to more on m. funding streams that.

The complexity has increased which suits our capabilities with the changing supply chain environment and the demand for more efficiency and predictability VM more digitalization.

Certain levels half on 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 healthcare.

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 $1 billion 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 $1 billion in revenue.

As you are aware the business is underpinned by sizable very long term high performing Fi 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 covert that also Brexit.

In Australia. The defense spending has actually been increased in recent times as Sterling government look to advance economic recovery, while modernizing the defense forces.

In Australia, our business is at the forefront of software development and implementation from mission planning virtual and augmented reality Sustainment systems engineering and naval training as.

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 EVP, including direct hire 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 and Twentytwenty, one 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.

But also well advanced and removing significant overhead costs.

From a market perspective, the drive to lower emissions product diversification and energy efficiency and more sustainable technologies and solutions is clear that.

The demand for our technologies across ammonia for food productions.

Olefins for non single use plastics, and and refining for product diversification and more green solutions to meet tighter environmental standards continues.

Our 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 Weve highlighted some recent successes on the right to demonstrate this.

Onto slide 13.

In summary, these market dynamics culminate in a very very healthy pipeline for KBR significant pursuits distributed across our portfolio.

As we've mentioned previously Twentytwenty on Twentytwenty, one our low recompete years, enabling increased focus on winning new business and the team has absolutely laser focused on this objective.

We have almost $20 billion and pursuits that will be awarded over the next six to 12 months.

And this is sort of three times annual revenue run rate of a healthy metric indeed and.

And this excludes the sentara, which will 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 arc.

Terrific and thank you Stewart our pick it up on slide 15, which lays out our key financial performance metrics for the quarter.

So overall as stewards summarize the business is tracking on or ahead of plan on each of these key metrics.

Our people our strategy and our balanced portfolio of businesses have collectively shown resiliency and predictability in the current environment.

Enabling scale in the business healthy profitability strong cash flow and continued bookings, which support growth targets going forward.

Revenues have grown remarkably well in our higher end solutions and services in our government business that Stuart just summarized.

And this is offset by some reduction in contingency support driven by changes in military OPTEMPO in select areas.

This shifting mix to more up market work is good for our business.

As these areas are more consistently prioritized and funded and hence less volatile.

On exiting Commoditized energy, we are seeing measured reductions in revenues as expected price.

Primarily from the de risking changes we made in our energy business earlier this year.

This is also good for our business as we shift to a greater mix of higher margin technology led solutions.

As you see profitability is consistent year over year at 9% with annualized EBITDA running at about $500 million.

This scale of profit in low risk well demonstrated business areas, certainly bode well in our recent credit offering and credit upgrades.

Incidentally this 9% is consistent with the 2021 outlook. We recently gave with the Centuri acquisition announcement back in August.

Adjusted earnings per share was 44 cents for Q3 were most and non operating items were pretty much consistent with expectations.

Cash flow was really good again in Q3 at $90 million and representing continued strong income to cash flow conversion.

Adjusted year to date op cash flow is circa $270 million, which now exceeds the total result, we had last year.

And is the basis for the bump up in guidance that I'll cover here in a moment.

I'll add all segments are contributing nicely to strong cash flow processes and of course the results you see.

We complemented all of this with good bookings across.

The business, both in quantum and in quality.

For the quarter with a book to Bill exceeding one dollar zero rounding out nice balance across project execution profits cash flow and winning new business for the future.

Onto slide 16 for segment results.

Government was up slightly over last year as Stuart said with double digit growth in both space and defense systems engineering with the offset again being the contingency component of logistics.

The main driver for the contingency logistics offset has been lower levels the troops in the middle East.

And delay in transition to our role in Afghanistan under lockout, five due primarily to the cobot situation.

However, the northern command component of all of the Logcap five win is ramping up nicely.

Furthermore, most of our work in North Con is funded out of the Olin on accounts of video D.R.

Just like Stuart indicated earlier.

And this is important as these activities are part of the baseline defense budget, and thus more stable and predictable.

Moving over to technology.