Q4 2020 KBR Inc Earnings Call HOUSTON Feb 23, 2021 (Thomson StreetEvents) — Edited Transcript of KBR Inc earnings conference call or presentation Monday, February 22, 2021 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alison Vasquez KBR, Inc. – VP of IR * Mark W. Sopp KBR, Inc. – Executive VP & CFO * Stuart J. B. Bradie KBR, Inc. – CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Alec Kaplowitz Citigroup Inc., Research Division – MD and U.S. Industrial Sector Head * Brent Edward Thielman D.A. Davidson & Co., Research Division – Senior VP & Senior Research Analyst * Jamie Lyn Cook Crédit Suisse AG, Research Division – MD, Sector Head of United States Capital Goods Research and Analyst * Jerry David Revich Goldman Sachs Group, Inc., Research Division – VP * Michael Stephan Dudas Vertical Research Partners, LLC – Partner * Sean D. Eastman KeyBanc Capital Markets Inc., Research Division – Senior Equity Research Analyst * Steven Fisher UBS Investment Bank, Research Division – Executive Director and Senior Analyst ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Good day, and welcome to the KBR, Inc. Fourth Quarter 2020 Earnings Conference Call. This conference is being recorded. (Operator Instructions) For opening remarks and introductions, I would now like to turn the call over to Alison Vasquez, VP of Investor Relations. Please go ahead. ——————————————————————————– Alison Vasquez, KBR, Inc. – VP of IR  ——————————————————————————– Good morning, and thank you for attending KBR fourth quarter and fiscal 2020 earnings call. Joining us today are Stuart Bradie, 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 2. 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 10-K available on our website. I will now turn the call over to Stuart. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Thank you, Alison, and thank you all for joining us today. I will start on Slide 4, 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. Our recent announcement on the Mura plastics recycling technology is another great example of a solution we licensed that enabled us a secular economy and continues KBR’s value-add journey, both to sustainability and for our stakeholders. We believe Mura’s technology is a banker, 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-com program. I would also direct you to our website for our latest sustainabilty report, which was published in December 2020. This takes us nicely on to Slide 5. 2020 was an incredible year. We did not allow this dreadful virus to halt our strategic process. Arguably, we went 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 engergy and a 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 license work, driving margins up and a growth in backlog with 3 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 the Mura 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 in 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%, 7-0 percent, 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 on to Slide 6. 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 that 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. Our recent announcement of TENCAP reinforces this and shows the value that Centauri brings to KBR. On to Slide 7, 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 3 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 nonmaterial directionally, this bears well, especially given our position in the human space flight 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 recompetes 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. On to Slide 8, 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 prepositioned 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 9, international. It’s 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 for one modest acquisition in the Naval training area in 2020. Increase in spending and increase of scale in Australia sees us enter 2021 with above normative growth expectation, especially in higher-end technical areas where we have strong demand expertise, areas like mission planning IT, augmented reality training, defense infrastructure and specialist life cycle support, as highlighted in the recent wins on the right. Our U.K. business, which you’re well aware, is underpinned by sizable base operational and maintenance contracts with long tenures. These mitigate volatility in the U.K. because we see the U.K. moving a little slower. That said, there will be increased funding into areas like cyber, space and intel due to the decoupling from Europe. Now onto Slide 10, sustainable technology. We have presented a few times recently on a sustainable technology portfolio, the associated 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 $1 billion 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 3 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 Mura’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 recompete 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 recompete 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 $1 billion 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? ——————————————————————————– Mark W. Sopp, KBR, Inc. – Executive VP & CFO  ——————————————————————————– Great. Thank you, Stuart. I’ll pick up on Slide 13, which lays out our key financial performance metrics for 2020. As I’m sure you gathered from Stuart’s remarks, we’re really pleased with our achievements this past year, reflecting the incredible efforts of our employees around the world. Some reflection, here since our transformation, we prioritized derisking the business, and in so doing, producing stable, predictable financial results, including strong cash flow, very important. We also set out to put legacy obligations behind us and begin deploying cash flow to move KBR upmarket and also tap other value-creation opportunities. I think fiscal 2020 and these charts themselves demonstrate our commitment and our ability to do all of these things. Our shift to sustainable technologies early in 2020 yielded a derisked exposure to traditional energy markets and, as you heard, places us firmly in the new economy with attractive and highly sought-after offerings in important areas like energy efficiency, decarbonization, energy transition, circular economy and gateway technologies to hydrogen energy solutions of the future. This produced a synergistic business with high backlog, strong track record, attractive margins and also free — strong free cash flow. Building on this, we improved the capital structure during 2020 as well, which enables lower cost of capital and greater flexibility for deployments going forward, plus more sheer liquidity and firepower. And with those improvements, we’ve reset expectations early in 2020 and have produced strong predictable core results through the year and positioned the company for growth in ’21. For the year, revenues, EBITDA and adjusted earnings per share were up modestly over last year on stable margins as expected, which is a clear demonstration of our business model resilience, strategic action, strategic discipline and also cost management. Cash flow was strong and up nicely from last year and well above our targeted operating cash flow to net income conversion factor of 1. Our transformed business now has low capital intensity, low risk and produces attractive and predictable cash flows, just like we set out to do. Just a couple of remarks on the next slide, Slide 14. Q4 was as expected. You’ll note, adjusted EBITDA grew 15%, demonstrating good momentum looking ahead into 2021. And margins were up to 9%, consistent with the level we set as to what expect for ’21 when we announced the Centauri acquisition a few months ago. For Q4, Centauri is reflected for the full quarter and did contribute to margin improvement. Corporate G&A was seasonally low in the quarter, pretty much as we expected, effectively offsetting the effect of the lower energy segment margin profile. On adjusted cash flow, we were hot coming into the fourth quarter on improved working capital effectiveness all year, and that leveled off in the final quarter. No change in fundamentals, and as you’ll see in guidance, another strong year is expected for 2021. And as Stuart said, backlog has been trending really well, and we finished 2020 with both government and technology up 20% year-over-year, a fantastic result that gives greater confidence for the future. On to Slide 15 and segment highlights. I’ll spend a little bit more time here. I want to point out, we’re really seeing an important shift in our government business. Stuart highlighted this, but it’s worth digging just a little bit deeper. As we’ve invested more in upmarket areas, we produced strong organic growth across our science and space and defense and intel areas, as Stuart said a moment ago. Increased presence and growth are important here as we see these areas being more emphasized from a national security perspective. We expect faster streams of growth in these markets looking forward. And quite frankly, we’re not alone in that view. We also grew in operations- and maintenance-funded readiness and sustainment activities that Stuart also outlined. These areas of growth offset contraction in contingency-funded logistics this past year, which was circa $300 million across Tyndall and our Middle East contingency work. Dependency on Middle East contingency work has now decreased significantly as a result, which I’ll quantify here in a moment relative to ’21 guidance. Again, this decrease has now been offset by strong growth in science and space, defense and intel, O&M-funded sustainment work as well as the addition of Centauri, which is high-end work in and of itself. The result of all this will be low single-digit mix of contingency work in our portfolio, replaced by upmarket, high-priority recurring work that can predictably deliver sustained earnings visibility for many years out. Over to technology. The team did an extraordinary job navigating for COVID and delivered impressive profitability and, perhaps, most importantly, further progress introducing advanced technologies, which are enabling our customers to produce end products in a safer, more environmentally responsible manner, a driving factor behind renaming this business sustainable technology. The best evidence of customer demand is the bookings production this past year. And as Stuart said earlier, we generated backlog growth of over 20%. Further evidence is the margins, 29% for the year on strong licensing mix. This business has continued to expand its proprietary technology impact in the process technology market, offering sustainable solutions that are in demand to meet growing commitment to carbon reduction and end-product flexibility. All of this bodes well for a strong ’21 and beyond. And finishing up with energy, no surprises here. Revenues are tailing off as we downsize for 2021. We were profitable as committed, with lower margins on commoditized cost reimbursable contracts that are now no longer being pursued. Now over to Slide 16, and I’ll shift over to capital matters. It’s really pleasing to see how the strength of the company’s cash flow production is becoming much more evident. We finished the year with a healthy net leverage level at 2.4x, after having just completed the largest acquisition in the company’s history. Furthermore, we made about $50 million in buybacks in the fourth quarter, consistent with our strategy to balance capital allocation across growth, and also return of cash to shareholders. This is also having increased our regular dividend 25% earlier in 2020. The outlook for balanced and material capital deployment allocation is terrific going forward, and our prioritization of those deployments is unchanged. Finishing up on Slide 17. Our guidance for 2021 is comprised of revenues in the range of $5.8 billion to $6.2 billion, with over 70% of that work secured in backlog today; an adjusted EBITDA margin of 9%; adjusted earnings per share of $2 to $2.20, representing 20% growth over 2020 at the midpoint; and adjusted operating cash flow of $280 million to $320 million. So here’s some color on the components given the changes we’ve made in the portfolio. On the government side, we’re targeting healthy revenue growth associated with the full year of Centauri; new wins and momentum discussed earlier, particularly in the science and space, defense and intel readiness and sustainment in international areas. Importantly, our guide includes just roughly $200 million in expected ’21 revenues from Middle East contingency operations compared to about $450 million in 2020 and $600 million the year before in 2019. So I want to repeat that. Our revenue guide includes only $200 million of the Middle East LogCAP activity compared to $450 million this past year and $600 million the year before that, 2019. There is potential upside here, but we think it’s best to remain conservative for now. Again, important takeaway is the magnitude of contingency work being replaced by more core, recurring, less volatile defense, intel and space work has taken place. And on the margins front, for government, we’re continuing to target annual EBITDA margins of 10%. On to technology, we are expecting a little over $1 billion of revenues from the new sustainable technology segment at EBITDA margins consistent with the earlier announced targets. We have a bit of a runoff on our legacy reimbursable projects in the first part of ’21 and expect to achieve our mid-teen tech margins as we progress through the year. From there, and as indicated previously, we expect margins will continue to expand over time. This all lands us at an adjusted earnings per share of $2 to $2.20 for 2021, phasing in at a circa 40-60 split between the first half and the second half of the year and, which I’ll repeat, represents 20% growth over 2020 at the midpoint. Now I imagine some of you may be trying to reconcile the mid-single-digit top line growth with the 20% adjusted EPS growth, so let me try to add a little color on that point. This really essentially comes down to two things. First, we’ve replaced high-volume, low-margin energy work with much higher margin, higher end solutions work in intel, defense, space and also from Centauri. And second, we’ve rightsized the go-forward cost base to suit the repositioned business. It took a lot of cost out in 2020. So together, these moves in 2020 have enabled a modest bump in top line revenues for 2021, but critically with amplified boost in profitability. The important takeaway is that the enhanced margins and profitability represent a real inflection point for the new KBR. Finally, as indicated earlier, cash flow expectations continue to be strong, with ongoing op cash flow conversion at roughly 1x net income. We expect a little more CapEx than usual this year, as we’re making investments in real estate consolidation and ERP systems. These are both geared to fuel economies of scale and cost reduction benefits later. CapEx is expected in the $35 million to $45 million range, still well below 1% of revenue and still producing attractive free cash flow, which we expect to deploy in a balanced fashion, as said earlier. So that’s my wrap for another good year for KBR and an even better outlook for ’21 and beyond. Back to Stuart. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Thanks, Mark. And on to Slide 18, our almost final slide for today. We want to leave you with a few key messages. On the right are the key takeaways from today, but I thought I might try to print these in my own words. KBR has been on a strategic journey for quite a few years, as you’re well aware. Strategically, we wanted to move upmarket, be more technically differentiated, exit commoditized businesses, exit risky and volatile markets and align our business opposite exciting markets of the future and simply deliver what we said we were going to do, not one quarter but quarter after quarter. And you’re probably thinking, sure, every business wants to achieve this, and many talk about what they’re going to do. But let me just say this. We begin 2021 having exited traditional energy, lump-sum EPC, construction risk, commoditized services. We also entered 2021 having reduced our reliance on contingency funding in the Middle East to nonmaterial levels, as Mark explained, and having retired a large number of legacy risks over the last few years and retired many poor performing projects from our portfolio. So I think we can make a very strong argument that we have exited commoditized and volatile markets. We begin 2021 with strong momentum in defense and intelligence, incredible performance in science and space, our reshaped readiness and sustainment business, an increasingly upmarket international portfolio and a suite of sustainable technologies that uniquely compound our ESG story in a very, very hot market. Our people do things that matter. They care, and, it’s hugely uplifting to be part of a company that does that today. So I think we can also make a strong argument that we have aligned our business opposite attractive markets of the future. We begin 2021 with revenue up a bit, margins moving up, EBITDA moving up and EPS outpacing revenue growth by quite a factor, as Mark explained. And I really think this is a strong reflection of moving upmarket, being technically differentiated with real proprietary IP and domain expertise. We have delivered every quarter, not for one quarter, but for every quarter for 4 years. One can argue one metric over another, but what cannot be argued is that true value is reflected in cash generation. We have delivered what we said we would do consistently. Our amazing people, our team of teams quite simply deliver. We have over 70% of the work secured to meet our guidance, and we are confident we will continue into 2021 and beyond to do what we said we will do. We start ’21 by no means the finish article, but certainly at the beginning of a new and exciting journey. Now on to our final slide. We will be hosting an Investor Day on the 25th of March and is themed Future Forward, and appropriately so. Our team will present KBR’s value-add ESG position. We will bring to life our people agenda. We will present in a bit more detail strategic growth vectors and why KBR is well positioned. And these will run nicely into presenting our longer-range targets through to 2025. This will, of course, be a virtual event, and we hope you can join us. Thank you. And I will now hand over to the operator, who will open the call up for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) We will now move on to our first question from Sean Eastman. ——————————————————————————– Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division – Senior Equity Research Analyst  ——————————————————————————– Congrats on finishing out the year strong. I just wanted to start on the $200 million of OCO-funded logistics disclosure for the 2021 outlook. It seems like you guys really want to drive that home. And just so it’s clear, I mean, really, you guys are just pointing out that logistics work in the Middle East is now just a tiny percent of revenue for government services and also that you have a big cushion in there for the uncertainty around the transition and where troop counts ultimately end up in the region. Is that the takeaway there? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I think so. Sean, I mean, to give you a little bit more color. As Mark said, we’ve got about $200 million in our guidance for ’21, and half of that is obviously related — but not obviously, but half of it is related to the work we’re doing in Iraq as we exit that piece of the contract. And half of it relates to, I guess, ramping up in Afghanistan. So there is a high degree of uncertainty on the timing of both of those events, but we’ve decided to take a very, very conservative view. We do think, potentially, there’s upside if things move along quicker. And there’s some evidence that, that may happen, but there’s by no means certainty. So I think that’s exactly right. But the key takeaway is just, I think, the progressive reduction in reliance in our revenue base from, as Mark said, ’19, ’20 into ’21 and replacing that potentially volatile funding stream by very steady, predictable funding streams, particularly in O&M in that segment, and hence, the renaming to readiness and sustainment. But yes, so less volatility, more predictability and longer contract tenures of that predictable nature and the fact that this potential upside, as you rightly pointed out. ——————————————————————————– Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division – Senior Equity Research Analyst  ——————————————————————————– Okay. Very helpful. And then just higher level for me, just so I’m kind of level setting. I mean, the dialogue on momentum in both the bid pipeline and in the backlog of late, I mean, clearly, overall budgets aren’t sort of matching that momentum, right? So maybe just from a high level help us understand exactly how you guys are seeing this velocity in the bid pipeline and the momentum in the bookings trends. That would be great. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– I mean, we did try and cover that off a little bit, and also in my closing remarks on trying to line the business up opposite markets that are well funded and attractive as we move into the future, and we saw that with the Centauri acquisition of lining up opposite national security priorities. We — and remember that we’re very operationally focused in terms of where we sit with our domain expertise. And I think you’re seeing that come through in strong resilience, not just in the bid pipeline, but actually the performance in 2020 and the momentum we’re continuing to see going into ’21. So I think it’s — I think you’re right that there are — there’s going to be pressure overall on budgets through time, but that’s always the case. And what you’ve got to do is you’ve got to line up to the bits of the market that you feel are going to be exciting and that are going to be well funded and where you’ve actually got deep domain expertise, where your technical know-how or your IP or your advantage really plays well. And I think KBR has done — the team has done an amazing job of actually aligning to those markets. And I think you’re seeing it in the pipeline. I think you’re seeing it in the book-to-bill. And people — others talk about their pipeline. But as I keep saying, the proof of the pudding is always in the eating. Are you actually delivering growth in your backlog through time? And I think this year and last year and whatever, we’ve actively demonstrated that we are positioned well. We are opposite attractive markets, and the book-to-bill and the backlog growth through the year would prove that out. ——————————————————————————– Operator  ——————————————————————————– We will now move on to our next question from Jamie Cook of Credit Suisse. ——————————————————————————– Jamie Lyn Cook, Crédit Suisse AG, Research Division – MD, Sector Head of United States Capital Goods Research and Analyst  ——————————————————————————– I guess a couple of questions. One, can you remind us what Centauri will contribute both on revenue and EBITDA for 2021, whether that guidance has changed or not? And then I guess my other question is given the work in the Middle East is becoming a smaller piece of the pie, can you just sort of update us, as we move past 2021, how to think about the sort of organic growth of the total government portfolio in margin profile or targets over the long term? So any update there? And then I guess how to think about G&A now with Centauri and sort of the cost actions you’ve taken. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Okay. So I’ll start, and Mark will finish. So the guidance for Centauri when we came out the gate is $700 million plus with margins in the low double digits, the 10% ZIP code, and that’s absolutely where it sits today in the ’21 guidance. And that’s very good growth from last year as we’re all aware. So that forecast and that analysis held up very, very strongly. In terms of the longer-term outlook for GS, it’s in that 6% to 10% ZIP code. I mean, we haven’t changed that. We’ll be updating obviously the longer-range targets in March when we hold our Investor Day, but that’s the outlook going forward as it sits today. And I think the backlog growth would indicate that, that’s achievable. In terms of the SG&A, Mark, would you like to comment on the longer-term outlook for that just given some of the movements and seasonal movements in Q4? ——————————————————————————– Mark W. Sopp, KBR, Inc. – Executive VP & CFO  ——————————————————————————– Yes. Jamie, first, wanting to add to the Middle East question and government is if you were to strip out the reduction from ’20 to ’21 in contingency logistics, which is the $258 million you get between the $450 million and the $200 million numbers I’ve provided, you strip that out, the organic growth in Government Solutions is in that 6% to 10% range for ’21. So that’s encouraging, and it is attributable to the great wins, takeaway, et cetera, that we’ve talked about here. And so that would be our view going forward, and we’ll talk more about that in the Investor Day in March, I’m sure. Relative to G&A, we had some savings in 2020 due to COVID, less travel, things like that. We’ve bumped that up a little bit for ’21. We do expect to return not exactly back to normal, but more toward normal at some point and pick up activity there. Plus we, as I mentioned, are making some investments in modernizing our infrastructure, and some of that’s hitting G&A. We’ve factored that all into the guidance. But the corporate line should still be about $100 million, which, I would say, is kind of normative. If you look back at ’19 and then ’18, that’s kind of where it was, and we kind of are expecting that range for 2021. And beyond that, I think we’re going to do our best to contain or even reduce that number with the investments we’re making in IT and some of the legacy structure complications that we are trying to work out of for legal entities to — those sort of things. So that’s the trend. So I’d say, back to norm pretty much in ’21 and then hopefully flatline that number or reduce it longer term. ——————————————————————————– Operator  ——————————————————————————– We will now move on to our next question from Jerry Revich of Goldman Sachs. ——————————————————————————– Jerry David Revich, Goldman Sachs Group, Inc., Research Division – VP  ——————————————————————————– I’m wondering if you could talk about your pipeline for hydrogen decarbonization energy transition applications. Obviously, nice to see the strong pipeline in GS. I’m wondering if we might have a similar conversation about your decarbonization portfolio and the cadence of potential awards over the next couple of quarters. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. So Jerry, we did, as you know, recently some investor events where we broke down our suite of IP and show that it’s lined up across a whole portfolio of sustainable technology offerings and not just hydrogen or ammonia, although ammonia is very, very exciting. So I think that’s the first thing to say, our ROSE technology on NOx and SOx, what we’re doing in alkylation, what we’re doing and looking at different solutions for refinery outputs and things like that is reducing energy consumption. And so I think we’ve got an amazing list of opportunities, and I think the best demonstration of that was the book-to-bill in the quarter. The book-to-bill in the quarter was well over 2.5 in tech. We talked about the year book-to-bill being well over 20% growth in backlog and things like that. But the book-to-bill has been well over 1 in Q2, Q3, but Q4 was outstanding with bookings well above 2 in the tech segment. So I think that’s probably the best demonstration. We’ve announced a number of those. I mean, you’ll have seen those announcements, so probably best we don’t spend all the time going into them today. But that’s probably the most tangible real number I can give you on this call to show the momentum around that sustainable technology portfolio. And I think the other takeaway from that is that — is really just the margin performance and the fact that, that business does run on negative working capital, which we can’t reiterate enough just how attractive the business fundamentals are around that segment. So that’s probably all I would say on that today. Mark, unless you want to say something more. ——————————————————————————– Mark W. Sopp, KBR, Inc. – Executive VP & CFO  ——————————————————————————– No. Thank you. I think you’ve covered it well, Stuart. ——————————————————————————– Jerry David Revich, Goldman Sachs Group, Inc., Research Division – VP  ——————————————————————————– Yes. And obviously, so you had strong momentum in the quarter. I’m wondering if we might be able to have a conversation around what the bookings outlook for that business is over the course of ’21. Are there any meaningful awards that you folks are in the running for? Any color on whether that bookings momentum continues into ’21 that you might be willing to share? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I mean, Jerry, these are red hot markets as you’re — I mean, you’re well aware in terms of what’s happening across the world opposite climate change. And obviously, the Biden administration is throwing fuel onto that fire, so it’s a very exciting time to have the portfolio, I mean, in a way that we’ve had some technologies that have reinvented themselves somewhat like our ammonia technology is, as people are using ammonia now to coal fire coal-fired power stations to reduce the carbon footprint immediately of coal-fired power station. So it’s a very, very exciting market. I would say that the activity levels are going up. The pipeline of opportunities is increasing, not the other way around. And I really think it’s a terrific time to be in the position we’re in. And as I said in my remarks, the timing of us realigning that portfolio into where it is today has — luckily enough, has worked out pretty well, and our people are busy as anything actually in terms of looking at opportunities going forward. So my view on this today is that the market and the opportunity set is going up even beyond what it has been in 2020. And I think as the world opens up a bit more, I think you’ll see more and more activity. ——————————————————————————– Jerry David Revich, Goldman Sachs Group, Inc., Research Division – VP  ——————————————————————————– And I’m wondering if you can comment on the Centauri integration. How has that business integration gone relative to your plan? Obviously, not the easiest environment to integrate a business. Can you just talk about how the integration team has performed relative to plan? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes, it’s going very well. We’ve done — the teams have got together and seen that they all speak a common language. I think culturally, very well aligned. Key people are all working very well together, put a lot of focus into synergy in terms of revenue. And the recent TENCAP win, which was a KBR bid with Centauri, we brought in as — I think, initially as a subcontractor, but obviously, that’s changed now. That really helped us sort get up and win that award. I mean, that’s — we just announced that recently as — for the Air Force and $500-or-so million over the next little while, so under the tip of the sphere in terms of R&D and fast fail and all the things that go with that in terms of prototyping and things. So really, really going well in terms of that revenue synergy opportunity. And I think in terms of the back-office piece, we will be working through that and through the course of this year, but that business was not broken. It was a well-run business on a standalone basis, so in such cases, when it’s not a carve-out, you’ve got a little bit more luxury of time to get the back office right. And — but the revenue piece and the cultural piece is going really, really well. ——————————————————————————– Operator  ——————————————————————————– We will now move on to our next question from Gautam Khanna of Cowen. We will move on to our next question from Steven Fisher of UBS. ——————————————————————————– Steven Fisher, UBS Investment Bank, Research Division – Executive Director and Senior Analyst  ——————————————————————————– Nice 2020. So just looking at the leverage, you’re now currently below the targeted leverage range. And it seems like there’s potentially another maybe $200 million to $300 million of capital that you could deploy and still stay within your 2.5 to 3x targeted range. And that’s on top of that, say, $200 million to $300 million of free cash flow you should deliver this year. So how are you guys thinking about the potential to deploy that capital base potential? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– I mean, again, I’ll start, and Mark can jump in. I mean, we will give more color on this in March, Steve, so I don’t want to steal any more thunder there. I think what is — your number, your assessment is absolutely correct, of course, in terms of we’ve done well in cash, and our net leverage is now obviously just sitting below our targeted range. And you’re right in terms of free cash flow. So we’re in really good shape from a liquidity perspective. I think we’ve got deployment options, which is always a good thing. We’ve — our priorities around that to date have not changed. We did buy back stock, as you’ve seen, in Q4, and it’s certainly an arrow and a quiver that we’ll use as appropriate. So that’s probably all I really want to say today because I think we will be addressing this more fulsomely in next month at the — when we get together for our Investor Day. Mark, any more that you wish to say now? ——————————————————————————– Mark W. Sopp, KBR, Inc. – Executive VP & CFO  ——————————————————————————– I’ll just confirm, Steve, the numbers are exactly right. So there’s firepower there in levering up, but responsibly so, plus the free cash flow being attractive. I did say earlier that we like a balanced capital deployment strategy, and we’ve proven that over time. And so it would be reasonable to expect similar going forward, and we’ll again talk more about that in March. ——————————————————————————– Steven Fisher, UBS Investment Bank, Research Division – Executive Director and Senior Analyst  ——————————————————————————– Got it. And then just on the quarter itself, the government margins were a little lower than I might have expected. Just curious how they compare to what you were thinking, if there’s anything dragging because of the Centauri close that might have been nonrecurring. And since you did guide to the 10% for 2021, how much variability would you expect around that over the course of the year? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– No. I mean, not much, a few bps variability, I guess, Steve. I mean, the bottom line in Q4, I think we come in at 9.3, 9.4, something like that, so another 0.1. We would have rounded up rather than rounded down. So it was not a long way off expectation. There were some seasonal impacts for people taking greater holidays and things as we run up to the end of the year, but there’s nothing sinister there at all. And the overall margins for the year are well in line with expectations, and our guidance for next year would — as I said before, we’re going to quite simply do what we say we’re going to do. And we set out margins at 10% or so next year, and we expect to meet those. ——————————————————————————– Operator  ——————————————————————————– We will now move on to our next question from Andy Kaplowitz of Citigroup. ——————————————————————————– Andrew Alec Kaplowitz, Citigroup Inc., Research Division – MD and U.S. Industrial Sector Head  ——————————————————————————– So you mentioned the book-to-bill was above 2x in Q4, so obviously, a ton of momentum in sustainable technologies. But are you thinking about your original guidance for when you’re doing your original guidance for 2021 in that segment, you had $1 billion of revenue, $150 million of adjusted EBITDA for ’21. I think you gave us that a quarter or 2 ago. Could that end up being conservative in what’s baked into your overall guide today? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– It’s a little tricky question that, Andy. I mean, I think at this point, the fact that we’re delivering that sort of performance next year is terrific, and we have a history of meeting or exceeding expectations in that arena. And we would hope that, that trend continues. But I think it’s too early to be saying just how — answering your question in a rhetorically loaded way would probably be not the right answer. But I mean I think we’ll stick to our guidance today. We’re very early on. I would say it is a very hot market. I would say there’s a ton of momentum in that segment. And I would say we’re very, very excited about the opportunity set that we’re seeing in front of us from a pipeline perspective and the dialogue we’re having with customers across the world. And so I do — we’ll come back to you with more color in March, but — and obviously, as we get to Q1 earnings, we’ll see how the business is performing. But I mean, it’s a terrific time to be opposite that market with the IP that we have. ——————————————————————————– Andrew Alec Kaplowitz, Citigroup Inc., Research Division – MD and U.S. Industrial Sector Head  ——————————————————————————– Can’t blame me for trying there. All right. Next question. So you mentioned the contingency work is still ramping down in ’21, but it sounds like there’s a bit more of an international drag from U.K. funding constraints that you saw in Q4. We know you’ve given on overall guidance for ’21, but would you expect more of a back-end loaded year for revenue in GS? And how dependent is organic revenue improvement on some alleviation of the U.K. funding constraints? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I mean, I think, the — I think overall, just to start at the big picture scenario, we do expect the second half to be a bit meatier than the first half, and Mark gave that color in his remarks. And I mean, there’s a good reason for that as things ramp up, particularly things like the Middle East and things like that. But in terms of the U.K., as you know, the majority, a very large proportion of what we do in the U.K. is underpinned by Aspire and MFTS and the other long-term PFI contracts. So that really protects us from any real volatility risk. So that’s a big message there that we — it’s not like we see major, major things going the wrong way here. It’s just that, in terms of the cadence we’re seeing in places like Australia, that’s up significantly, the U.K. is growing at a slower pace for obvious reasons. So I think it’s as steady as she goes in the U.K. with a little bit of pressure, if you like, because we’ve come off — I mean, Aspire Defense, half of the capital piece of that was essentially finish through ’20 anyway. So not a big shift in the revenue base there. So I think it’s kind of okay, and we’ll — as I said, it’s a steady stream in the U.K. and just not at the same sort of level of increase that we’re seeing in places like Australia and that we’re seeing, obviously, at national security priorities in the U.S. and things like that. So it’s just a more measured approach, I think, is probably the way to describe it. ——————————————————————————– Operator  ——————————————————————————– We will now move on to our next question from Michael Dudas of Vertical Research. ——————————————————————————– Michael Stephan Dudas, Vertical Research Partners, LLC – Partner  ——————————————————————————– Stuart, first question, how do you prioritize your pipeline, which appears very robust from long-term target to the $15 billion of near-term opportunities? How do you prioritize that relative to length of contracts, returns? Is it just whatever market is growing the fastest you’re involved in and you think there’ll be more opportunity there? Are you putting business development or some investment in areas where you want to shore up or enhance some of the businesses that you have? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I think it’s sort of almost 2 different questions in a way, Mike. I think, obviously, as we look inside the businesses themselves and what’s coming down the pipeline, I think, as you’re well aware, the procurement pipeline in the government arenas is reasonably transparent as to what’s coming down, and you can position for the things where you feel that you’ve got the best chance of success. So I think our teams do a very good job. As you know, our win rates are really strong. And I think we pick and choose our fights, if you like. So I think that’s probably the way to answer the first part of the question. In terms of the second in business development or investment, I think we would continue to invest in areas where we feel there’s things like our recent announcement for Mura that we talked about a little bit in terms of plastics recycling and the opportunity set there as the market evolves in that arena. So I do think it’s — we are looking very strategically. I think you’ve seen that in our past. I think we’ve tried to line the businesses up in a way that does reflect our outlook for good businesses of the future or good markets of the future. And so in terms of where we’re positioning our sort of investment dollars, I think, they will align to the strategic growth vectors we’ve presented in the past, and we’ll do so again in March in terms of where we think there are new opportunities in places like cyber and things like that as we get to understand the Centauri capability, combining that with the KBR capability to be just something that we think is more niche and exciting and lines up to good spending priorities into the future. So you’ll get a bit more color on that in March. ——————————————————————————– Michael Stephan Dudas, Vertical Research Partners, LLC – Partner  ——————————————————————————– I appreciate that, Stuart. My follow-up would be, you mentioned in your response about the Mura technology, and I think that seems to be pretty exciting stuff. Can you maybe elaborate a little bit more of like how it came about? And what are some of the opportunities that you’re seeing just from that announcement? And what are you being planned over the next several quarters to several years? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I mean, you’re right. It’s a very exciting market. And as you know, there’s a lot of capital flowing into that area for in a number of cases back in technology that has yet to be proven. I think the nice thing about Mura is that they’ve got a number of facilities that are not quite at world scale yet, with the first world scale ones being built in Wiltshire in the U.K. But the reason we like this technology is because it’s hugely environmentally friendly process to begin with, so it basically takes water. And the way it actually works is there’s no carbon emissions in the way they sort of recycle energy and things. But basically, they take water and they pressurize it and use high temperature to break down plastics, but not just single-use plastics or the easier plastics to break down. It actually breaks down most plastics. And I think anyone who knows much about this knows that most of the plastics that recycle, only about 10-or-so percent actually get used in the recycling process. But this technology addresses that issue and then actually produces an output that can actually be taken by refiners to replace actually their existing feedstock or their raw feedstock. So it really drives and meets their sustainability agenda of using recycled feedstock in their processes. So I think from a — I guess, from a mouse trap perspective, we feel that we’ve got the right IP, and it comes with attributes that are quite unique in the marketplace. So we’re very, very excited about that, and more to come in the opportunity set with that. I mean, there’s a number of opportunities that you would expect as this technology gains more and more momentum. I mean, even Richard Attenborough has been — those who know Richard Attenborough has been talking about this technology as a potential solution for some of the issues facing plastics going into the ocean into the future and things like that. So it’s really, really terrific in terms of exposure. I think the opportunity set will be of a global nature, but it will be measured as well. I don’t think we’ll be taking on commitments and things that we can’t meet. So — but I think, so far, all the — everything we’ve heard and anything we’ve seen and the opportunities coming in the pipeline with Mura are very, very, very attractive. ——————————————————————————– Operator  ——————————————————————————– We now move on to our next question from Brent Thielman. ——————————————————————————– Brent Edward Thielman, D.A. Davidson & Co., Research Division – Senior VP & Senior Research Analyst  ——————————————————————————– A question on the — just the emphasis within the former logistics piece of government, now readiness and sustainment, particularly the O&M-related work. Can you talk a little more just about the addressable market you’re after, the types of program this business is going to look to pursue that it hadn’t done before? And I think you talked about higher value. How do we think about the differences in margins or profitability versus the legacy logistics work? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Yes. I mean, good question and timely as well. So you’re right, we’ve put a lot of emphasis into — we’re talking a while about the change in the business mix in what was logistics and is now readiness and sustainment for quite a while. We were at pains, I think, in the GS in Focus Day earlier in the year to explain that the margins and returns in this business were probably above what The Street felt they were because I think The Street felt we still had quite a sizable exposure to that typical OCO funding stream, which typically comes in at the lower margins. And we had — we’ve explained through time, we’ve been reducing our reliance in that arena, and that business itself has really expanded its international footprint and its domestic footprint. So in the international arena, we’ve obviously talked about Djibouti in the past in Bahrain and what we do in other places, but these are long-term base operational support contracts typically on a fixed fee basis. And so therefore, when you become more digital, you can actually process. It’s all about data and having the cleanliness of data that you can actually rely on it to get more efficient. And if you become more efficient, you drive margins up. And we’ve got a really, really strong history of doing that over the past 3 or 4 years, as that business has become more and more digitally enabled. We’ve recently just added the UA BOSS contract, which is in Turkey and Spain. That’s about $1 billion over the next 10 years or so. So again, really good momentum going into next year. And with a book-to-bill well over 1 for the year, I mean it’s terrific. And I think from a domestic viewpoint, from an O&M piece, LOGCAP V, everyone thinks it’s OCO funded, it is not. There’s a lot of it that comes from ops and maintenance as well. And the work that we’re doing in and around the U.S. today is growing at a much higher clip than we expected. And we talked about that a few quarters now, and that momentum continues. We’re doing — our teams are performing exceptionally well, and that continues to grow. And it’s funded through O&M. So the work we’re doing at Fort Irwin in terms of supporting the training activities and getting troops ready and all that sort of thing, absolutely in the wheelhouse of readiness and sustainment. I mean, can you continue to do quite a bit of work supporting OEMs as well in the U.S. around some of their facilities and what — on your some high-end work around materiality and things like that. So all that has continued with very strong momentum, and there’s a very good balance in with — in domestic with that and the preposition stock work that you’re well aware of that we do for the Marines and the Army, which is also going pretty well in terms of the performance perspective. So I think it’s a combination. I think the way that this business is repositioned is — needs to be admired really, really strongly. And the margin performance is in line with our broader GS margins, and it is not the low-margin business that you expect. And I think the change in the revenue mix actually has driven that and the digitalization. And we talked a little bit about that in the call as well in terms of the way we’ve increased automation and things to help reduce cost and therefore drive margins up. ——————————————————————————– Brent Edward Thielman, D.A. Davidson & Co., Research Division – Senior VP & Senior Research Analyst  ——————————————————————————– Okay. That’s helpful. And then the sustainable technology segment, this sort of gradual transition happens across the globe, Stuart, how do you think about the assets that might not necessarily meet the criteria that’s sustainable? And I assume there’s still a lot of value to those. And is that something you look to monetize as you further reposition the business here? ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– We don’t — we’ve got very few of that in our portfolio today. I think we were very timely in the work that we exited. And really, what we’ve got today in the technology solutions — the sustainable technology solutions portfolio is the suite of IP that lines up to the sustainability and climate change agenda across the world. And we’ve got an advisory business in a what we call technology-led industrial solutions, which is high end sort of performance of assets to reduce — to make them more energy efficient or make them far reduce the carbon footprint of how these assets perform. So these are digitally enabled tools that allow us to do that, particularly when it relates to our own technology. So we’ve got — I don’t think we’ve got assets in — associated in KBR today that we have to or need to dispose of that are not aligned to that sustainability agenda and where we’re pointing that business. I mean, that we’ve just — we’ve effectively exited what we wanted to exit, and we’ve closed down those businesses and moved out of those projects in domain. There’s a little tail coming in and — as we come through Q1. But as Mark said, that’s it. ——————————————————————————– Mark W. Sopp, KBR, Inc. – Executive VP & CFO  ——————————————————————————– And I’ll just add, we sat down and looked at the same question relative to all of our offerings in the sustainable technologies segment, all of it, including what came over from the previous energy segment. And while some offer new focus on end-product flexibility, they also offer safety and/or energy efficiency propositions. And so when you look at energy transition consulting, when you look at TLIS, when you look at almost everything that’s sustainable heritage does, about 80% to 90% of every offering we have has an energy efficiency component, safety component, energy transition component, et cetera. And so that supports what Stuart said about we really have a portfolio that is square on this megatrend of sustainability. ——————————————————————————– Operator  ——————————————————————————– It appears we have no further questions. I’d like to turn the conference back to Stuart Bradie, President and CEO, for any closing or additional remarks. ——————————————————————————– Stuart J. B. Bradie, KBR, Inc. – CEO, President & Director  ——————————————————————————– Just thank you very much, and really just thank you for taking the time to listen today. We’re obviously pretty proud of 2020, and a big shout out to all our people who really delivered for us in what was a unique and difficult year. And I think we’re very well positioned moving into ’21, as we described on the call. And we — hopefully, most, if not all, of you can attend our virtual Investor Day on the 25th of March. So thank you. And no doubt, we’ll be talking to some or all on sort of one-on-ones or whatever in the next little while. So thank you again for attending today. ——————————————————————————– Operator  ——————————————————————————– Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.