KBR Inc (KBR) 2007 Q1 法說會逐字稿

Good morning, everyone and welcome to the KBR 2007 first-quarter earnings release conference call. Today's call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following the prepared remarks. You'll receive instruction at that time. For opening remarks, I would now like to turn the program over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Good morning, and welcome to KBR first-quarter 2007 earnings conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days. The press release announcing the first-quarter results is available on KBR's website. We have tentatively scheduled our 2007 second-quarter earnings conference call for Thursday, August 2.

Joining me today are Bill Utt, Chairman, President and CEO and Cedric Burgher, CFO. In today's call, Bill will provide opening remarks and will discuss our overall operating performance and business outlook. Cedric will address KBR's financial position, backlog, strategic uses of cash and other financial items. We will welcome your questions after we complete our prepared remarks.

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31, 2006, the final prospectus for the exchange offer dated March 27, 2007, our Form 10-Q for the quarter ended March 31, 2007 and recent KBR current reports on Form 8-K. Now I will turn the call over to Bill Utt.

Thanks, Rob and good morning, everyone. April 5, 2007 marked the complete and final separation of KBR from Halliburton, KBR's parent for the last 44 years. This separation represents perhaps the most significant milestone in KBR's 100 plus year history. As with most corporate separations, both Halliburton and KBR will now focus exclusively on their respective core businesses.

Over the past year, I, along with the rest of KBR's senior management team, spent approximately 20% of our time focused on the separation. This process was draining and a distraction to the entire organization. Now with the separation behind us, we are able to reallocate these efforts back into managing and growing the KBR business. For KBR, it is now a time to move forward with singular purpose and build upon our reputation as one of the world's leading engineering, construction and services companies.

Let me discuss with you three key areas of focus that will define the new KBR. First, KBR will demonstrate a renewed emphasis on its commitment to our customers. To be a valued business partner we will not waiver from our work ethic and our commitment to safely deliver our services anytime, anywhere and under any condition. KBR's customers will benefit from our renewed focus on timely project execution within our target budgets.

Second, KBR will achieve best-in-class risk awareness by integrating our engineering, construction and services capabilities with solid, fundamental business judgment. We will understand and be cognizant of all the risks associated with our projects and price these projects to achieve acceptable risk-adjusted rates of return.

Third, we will create shareholder value. We will achieve this through smart prospect analysis and pursuit. At times, this may mean saying no to prospects presenting unacceptable balances of risk and return. In addition to better prospect analysis, we will continue to focus on our key metrics, including job profitability, return on capital, overhead spending and steady EPS growth.

Now I will review our first-quarter results. Consolidated KBR revenue for the first quarter of 2007 totaled $2.3 billion compared to $2.5 billion for the fourth quarter of 2006. The majority of this decrease relates to lower activity in Iraq. Consolidated operating income for the same periods were $62 million and $121 million respectively.

In the first quarter of 2007, operating income included a $20 million charge on BRC, the Brown & Root-Condor joint venture in Algeria. I will talk more about this joint venture in a few moments.

Now let me turn to our three segments. As noted in today's earnings release, we have created a new reporting segment, KBR Ventures. This group is now responsible for managing KBR's equity investments. I will come back to Ventures in a minute.

Energy and Chemicals revenue for the first quarter of 2007 was $576 million compared to $688 million for the fourth quarter of 2006. Operating income in the first quarter was $13 million, a decrease of $47 million sequentially from the prior quarter, primarily resulting from the BRC charge.

Also contributing to this decline was a decrease in activity in some of our gas monetization projects in the first quarter and the completion of some offshore program management and engineering projects in the fourth quarter of 2006. As we previously disclosed, the civil unrest and security issues that currently exist in Nigeria, as well as soil conditions at the project site and other matters, could cause our 50% owned Escravos joint venture to incur substantial additional cost increases.

Prior to the first quarter of 2007, our customer had approved $264 million of change orders, leaving $43 million of unapproved change orders remaining at December 31, 2006. During the first quarter of 2007, KBR identified approximately $63 million in additional costs for the Escravos joint venture, which were offset by probable, unapproved change orders. This resulted in no charges being taken by KBR in the first quarter for the Escravos project.

As of March 31, 2007, the Escravos joint venture has $106 million in unapproved change orders, which includes the $43 million from December 31st that remains outstanding and the $63 million that arose in the first quarter of 2007. Consistent with the change orders agreed to during the fourth quarter of 2006, the project owner has actively worked with us and our joint venture partner to provide entitlement to additional change order revenues for these cost increases and we are working to obtain the project owner's final approval.

As we look ahead on the Escravos project, we, our joint venture partner and the project owner continue to have an active and ongoing discussion to find an optimal way to execute the project, respecting the interests of all parties. The remainder of our fixed-price gas monetization portfolio is performing well and according to our financial plan at this point in time.

Now let me return to the BRC joint venture. Due to a recent decline in new work awarded and cancellations of work previously awarded to the venture on nonhydrocarbon related work, we took a $20 million charge in the first quarter of 2007. This consists of an $18 million impairment of our net investment in this venture, plus an additional $2 million representing billings for our services provided to BRC during the first quarter, which we do not expect to recover.

From a strategic perspective, this business has evolved to where the joint venture does not make much sense for KBR to continue its involvement in BRC, but the business could have some future value for Sonatrach long term absent KBR. We are currently discussing possible ways to dissolve BRC with Sonatrach, including a possible sale of our interest in BRC to Sonatrach, although no formal agreements have been reached.

In Energy and Chemicals, we are excited with our prospects to revitalize and grow our business in a couple of areas. First, we are reemphasizing the North American industrial services business, which KBR essentially pioneered in the 1950s. Aging facilities, a greater willingness to outsource and a heightened awareness on safety are creating increased spending for O&M work.

Second, we will increase our focus on the domestic construction market. A clear demonstration of our efforts is reflected in our win of the front-end engineering design for a 42,000 barrel per day refinery expansion in Toledo, Ohio. With our history, legacy experience and excellent health, safety and environmental track record in these two market segments, we believe we can and will be successful in these markets. With a renewed focus on these businesses, we have been successful recently in bringing back on board three KBR alumni to lead these efforts.

Now let's talk about the Government and Infrastructure division. The first quarter of 2007 revenue was $1.7 billion, which compares to $1.8 billion in revenue for the first quarter ended December 2006. Operating income was $55 million in the first quarter of 2007, a $13 million decrease sequentially from the prior quarter due to the favorable partial settlement of containers in the fourth quarter of 2006, a reduction in Middle East activity and a decline in worked at the DML shipyard due to the completion of a project in the fourth quarter of 2006.

Let's discuss briefly DML. We are engaged in discussions with the UK Ministry of Defense regarding our ownership interest in DML and the possibility of reducing or disposing our interest in DML. We have received indicative offers for our interest in DML and we and DML's other shareholders are currently supporting a process to formalize the offers received. At present, no decision has been made with respect to a disposition of our interest. If we decide to exit the DML business, the disposition could possibly occur as early as the end of the summer of this year.

Let me provide an update on our LOGCAP work. We are currently working on a $3.5 billion task order under the LOGCAP III contract awarded in August. We believe it is likely that the customer will extend the LOGCAP III contract to the end of 2007 or possibly later than that. Our customer has recently indicated that LOGCAP IV will be awarded during the second quarter of 2007 and we still expect that the LOGCAP IV contract will be divided among several contractors.

In addition, I would like to make sure that everyone is aware that there are new guidelines for recognizing award fees with service-only contracts entered into after June 30, 2003, which, of course, will include LOGCAP IV. Due to the service-only nature of the contract, award fees under LOGCAP IV would be recognized only when definitized and awarded by the customer. This would likely cause some earnings volatility because award fees are typically reviewed and awarded every six months compared to the present LOGCAP III contract where KBR is able to accrue award fees.

Now let me discuss our newly formed reporting segment, KBR Ventures. The Ventures group develops, arranges financing for, makes equity investments in and participates in managing entities that own assets that are the result of projects in which one of our other service-based business segments has a direct role in the engineering, construction, technology supply and/or operations and maintenance.

Ventures operations were previously reported as part of either the Government and Infrastructure or Energy and Chemicals segment operations depending on where the project originated. Significant investments in this segment include the equity related to Allenby & Connaught, EBIC, Alice Springs-Darwin Railway and UK toll roads.

It is also important to understand that our ownership position in most of these projects is less than 50% and the financial results are not consolidated. This means that the revenue will generally equal our share of the earnings less our internal cost for the group.

In addition to taking an equity position in projects, KBR may also invest in technology joint ventures to accelerate the commercialization and expansion of our technology portfolio. As most of you know, KBR has taken a new approach in terms of project equity investments it will consider. Going forward, we will not participate in project equity investments that would expose us to merchant risk, such as toll roads and railways.

In addition, when making a decision on an investment, the financial profile of the investment will be considered separate and apart from the services work for the other two service-based segments. We believe that there are good opportunities for project equity investments that will meet our new investment criteria. As such, we have broken Ventures out to become a separate segment to provide better visibility.

Ventures operating loss for the first quarter of 2007 was $6 million compared to a loss of $6 million for the fourth quarter of 2006. Operating loss in the first quarter of 2007 is largely due to losses in both the UK toll road and the Alice Springs-Darwin Railway project in Australia. Operating loss in the fourth quarter of 2006 is mainly attributed to the Alice Springs-Darwin Railway project in Australia.

As I mentioned last quarter, we are continuing to evaluate management restructuring and corporate organizational changes. You may see continued reductions in our overhead in 2007 and for the first quarter, we took no charges related to restructuring. As we mentioned on last quarter's earnings call and detailed in our public filings, we continue to experience delays and awards for large projects, particularly in gas monetizations. These delays are resulting from our customers reevaluating the project economics.

These re-evaluations are being driven primarily by two factors. Factor one is supply chain increases in commodity, manufactured equipment and construction labor. Since the end of 2003, many equipment and material prices have nearly doubled. This was initially driven by raw material or commodity pricing, such as scrap steel, copper, nickel, zinc and now an additional driver, the demand for finished product.

The second factor involves the long-term stability and outlook for oil and natural gas commodity prices. Dramatic and unpredictable increases in commodity prices during the last three years have led to very short supplier pricing validities and a lot of uncertainty in the market. Metals, such as nickel and copper, have seen a peak increase of 3.5 times their April 2004 price. Nickel was selling at $23.76 per pound in early April compared to $6.62 a pound in April of 2004. Other commodities such as zinc, titanium and scrap steel have also been very volatile.

Despite these market factors delaying project awards, we still believe long-term prospects for our core Energy and Chemicals market is favorable given the increased global demand for energy. However, in the meantime, KBR continues to seek a more diversified mix of projects across the entire hydrocarbon value chain. As we've previously said, these delays and awards may materially impact our Energy and Chemicals segments 2007 and 2008 results.

In general, it has become very difficult to predict whether or when KBR will receive these large project awards as these contracts frequently involve a lengthy and complex bidding and selection process, which is affected by a number of factors, such as financing arrangements, contractual negotiations, governmental approvals and environmental matters.

I want to thank each and every one of KBR's 50,000 plus employees for their tireless work, commitment and dedication over the past months as we sorted through this complex separation from Halliburton. KBR's employees are our greatest asset. They have continued, regardless of the challenges, to provide the quality service and products our customers have come to expect from KBR. It is my sincere desire that our commitment to our customers will continue to gain traction as we move forward in 2007.

Within KBR, I have declared 2007 to be the year of the customer. We need to focus on maintaining our current customers, providing them with unparalleled service and continuing to attract new customers. Quality customer service is the chief cornerstone of our business. Now I will turn the call over to Cedric. Cedric?

Thanks, Bill. Now I would like to begin with a review of our backlog. Overall, the backlog portfolio mix at the end of the first quarter has moved to 64% cost reimbursable and 36% fixed-price as compared to 53% and 47% respectively at the end of the year.

The Energy and Chemical division's backlog as of March 31 was $4.8 billion as compared to $5.7 billion at December 31. This decrease is driven by project work-off, a $300 million reduction due to our BRC impairment and the shift in mix towards higher levels of reimbursable work.

The Government and Infrastructure division's backlog as of March 31 was $6.5 billion, a $607 million decrease from the prior quarter, largely due to significant work-off on our LOGCAP III contract.

The new Venture division's backlog as of March 31 was $628 million as compared to $616 million as of December 31. This backlog is largely related to the financial, administrative and life cycle components of our Allenby & Connaught and heavy equipment transport contracts, as well as the merchant investments formerly in the G&I division.

Now I would like to discuss our liquidity and balance sheet. At the end of the first quarter of 2007, our balance sheet remains strong with cash and cash equivalents of $1.3 billion, which represents a sequential decline of $174 million. This decline is primarily due to the settling of $123 million of expenses related to transition services with and taxes payable to Halliburton. At quarter-end, our debt remains negligible at $16 million, a $4 million decrease over the prior quarter.

Let me spend a few moments to address our cash and liquidity requirements. Of the approximately $1.3 billion in cash on the balance sheet, $470 million is cash associated with our consolidated joint ventures. These amounts typically represent advanced billings for work yet to be performed on joint venture projects. Thus, these amounts are not available for general corporate purposes. Of the remaining $800 million, we expect to need $300 million to support working capital requirements for our work in Iraq and approximately $100 million to $200 million to support our normal operating activities for the rest of our business.

The remaining $300 million to $400 million is what we currently consider to be available for strategic purposes at this time. We are reviewing several alternatives as to the potential strategic use of cash, including opportunistic acquisitions, increased technology development or investments, project equity investments, as well as returning capital to our shareholders.

In regards to acquisitions, we are not considering businesses outside of our core expertise, but we are aware of potential opportunities that could help us accelerate growth in our core businesses and provide a good return on invested capital.

With respect to technology investments, we have been increasing our R&D spend and also would be interested in acquiring certain technologies to complement our existing portfolio. As most of you know, our process and petrochemical technology is a key differentiator for KBR.

For equity investments, we will continue to look for opportunities that our appropriate stand-alone investments with risk-adjusted expected returns in excess of our cost of capital and which include significant pull-through for our technology and/or services.

Our EBIC and Allenby & Connaught projects are good examples of equity investments that meet these criteria. However, will no longer consider taking merchant risk, such as was the case with our toll road and railroad investments.

Finally, we will be looking at ways to return capital to our shareholders. However, to do so, we will need to amend our revolving credit agreement, which limits share repurchases to $25 million a year in connection with equity compensation programs.

Now let's review other financial items. General and administrative expenses included in operating income decreased by $6 million to $29 million in the first quarter of 2007 due to a $5 million restructuring charge we recorded in the fourth quarter. We continue to expect our general and administrative costs to average about $30 million per quarter in 2007.

Our net interest income in the first quarter was $13 million, which was relatively flat compared to the previous quarter. Our effective tax rate in the first quarter was 44%. The tax rate has been largely impacted by three issues. First, there is no tax benefit recognized on the BRC impairment. Second, the new Texas margins tax, which is considered an income tax, for GAAP reporting purposes. And the third, foreign losses which cannot be used to reduce taxable income. We now estimate KBR's effective tax rate in 2007 will be in the low to mid 40% range.

Our working capital at the end of the first quarter was $1.1 billion, an increase of approximately $140 million over the prior quarter. This sequential increase in working capital is primarily due to our work in Iraq. Capital expenditures totaled $12 million for the quarter and depreciation was $13 million. For the full year of 2007, we expect capital expenditures to be approximately $90 million and depreciation to be approximately $57 million. And now I'll turn it back over to Bill for his final remarks. Bill?

Thanks, Cedric. As Cedric and I conclude, KBR's first earnings call as a stand-alone public company, I would say that our first quarter did not meet our expectations. Over the past 18 months, KBR's focus on large gas monetization projects resulted in a reduced focus on our other Energy and Chemicals sales and marketing activities. With the delay, cancellation and in some cases lost pursuits, KBR now finds gaps in its backlog and expects reduced revenues in the near term.

Starting several months ago, we sought to actively redeploy our sales and marketing teams across the broader hydrocarbon value chain. We expect to see the benefit of our broader based sales efforts beginning in the second quarter this year. We are enjoying the opportunity to now focus exclusively on KBR's customers and how we can best meet their project and services execution needs both in our Energy and Chemicals and Government and Infrastructure businesses. I am optimistic this will also result in an improved KBR performance over the coming months.

Now we will take your questions. We ask you to limit your comments to one question and one follow-up.

(OPERATOR INSTRUCTIONS) Andy Kaplowitz, Lehman Brothers.

Could you talk about your E&C other backlog? I think you alluded to it a little bit on the call that sort of you've been focusing more on gas monetization, but it dropped -- I guess $300 million of it was BRC, but what else is going on there? And how quickly can we sort of get the momentum back in that part of E&C?

Yes, you did correctly see that $300 million was due to the BRC impairment. EBIC is also in that portfolio and there was a good amount of work-off from that project. And really the rest is across the board project work-off and progress.

In terms of timing on repositioning or reinvigorating that backlog, I think it is consistent with the comments we made of being able to see some results occur in the second quarter from our repositioning of our sales and marketing activities.

The other comment I would make is as we have shifted more towards reimbursable work, procurement doesn't flow through our books and that is impacting backlog across all three components of the E&C group, including the other segment.

I understand. And maybe could you guys go over what opportunities are out there in gas monetization that you are focusing on? Any detail that you could provide would be helpful in terms of what we are looking at over the next couple years or at least what you guys are participating in now.

I think the projects that have been announced in the market by the various developers, integrated oil companies, national oil companies, are the ones that we are looking at. There are still a lot of them that our out on the prospect list. The question for us largely becomes a question of when as opposed to if. And it is really -- for the reasons we talked about of the very rapid price increases in our supply chain that has caused a lot of these project sponsors to pause and think about their economics and their underlying risks in this new price environment.

Thanks. I'll get back in queue.

Al Kabili, Goldman Sachs.

Good morning, guys. Question on the Escravos charge. So the $63 million, has that formally been approved by the client or is that in the probable unapproved claims on the balance sheet?

These are probable unapproved claims, both some existing from the fourth quarter of last year, as well as the first quarter. We have submitted these change orders to our customer. They are in the process of being reviewed and we believe based on our interpretation of the contract as supported by third-party review of our position that these will ultimately be recoverable as change orders.

Okay and I noticed on the 10-Q, you actually didn't show an increase on the overall level of probable unapproved claims. So is that just work-off of some other items or can you help me understand that? If I look from December 31, 2006 to March 31, 2007, I would've expected a sequential increase in that.

We are looking for that. Obviously on the Escravos project, that would have been an increase on just that project alone. I guess there were some approvals that would have taken -- would be the explanation for the other piece.

We had the big piece of $264 million that was approved and it might have just been -- we will look that up and get back to you on that.

Okay. Then a question on the opportunity outside of LNG. As you explore these other opportunities, what are the implications for the segment E&C margins? Are these that would take the margin opportunity down from this current level or up or flat?

We've seen a lot of -- as we've moved -- very heavily toward our risk awareness programs that we've implemented, we've seen actually some margins that we're very happy with in terms of these smaller projects that are going through our backlog and through our income statement. We are not expecting to see a material fall-off in our net realized margins as we look at the projects moving from the fixed-price arena to the more shorter cycle reimbursable project cycles.

Okay. I'll get back in the queue. Thanks, guys.

Al, I'll just mention that the table you referred to was related to claims not unapproved change orders. The unapproved change orders is in the footnote below the table.

Okay, got you. Thank you.

Barry Bannister, Stifel Nicolaus.

Given the headline risk and the unrelenting criticism, including today's subpoena related to LOGCAP III and activities in Iraq and also given the very high level of EPC firm interest in LOGCAP IV, are the assets associated with that business something that could be carved out and sold at some point if you chose to do so?

I will tell you we haven't begun thinking about any carve-outs that you describe there. The project that we execute for LOGCAP III and hopefully LOGCAP IV, while it is very much in the political arena today, we remain a solid and well-regarded supplier to our customer, the U.S. Army. We have continued to receive in our minds excellent award fee scores for our performance in theater.

It is obviously a -- there is some publicity that goes with that work given the change in the legislative branch of the United States Congress. And we expect it will continue. But at the end of the day, we believe that the services we provide will stand the test of inquiry of investigation.

We've also to date have passed through over audits from over 20 plus federal agencies in terms of our performance of our work in Iraq. And we believe we continue to do a good job as evidenced by our award fee scores from our customer. So it is very much a part of what KBR is. And if we go back and think about some of what makes KBR unique in the world, it is our ability to safely perform projects anywhere, anytime, under any condition. And we think LOGCAP III and hopefully our participation in LOGCAP IV will continue to be part of the mainstream values of the Company.

And on the subject of safety, I noticed on May 1 that one of your Escravos client's tankers was seized and six workers were kidnapped. The client's responsible for the security on site at Escravos and there is very little it would seem, is there some mechanism that you could describe or some way of a time-out where the project could be canceled if it is unable to start by a certain time or is that even a possibility?

I think if you go back and look at our comments that we have experienced some delays and some of those delays are related to security. We believe that the provisions in our contract with our customer giving rise to do who has responsibility for the security are being honored by our customer and that part of our ability to successfully get these unapproved change orders validated by third parties as being ultimately recoverable by the Escravos joint venture is an indication of how we're able to work that through the existing contract.

So we do expect that we will continue to be successful dealing with issues of security that might affect our performance under the contract. And we also do continue to maintain an active and ongoing dialog with the customer to examine always to most optimally execute the project.

In your career, though, Bill, executing a project like this with so much risk or a project that is just simply worth canceling, have you run into examples were cancellation emerged as an option and would that involve reversals of some of these charges and removing a project from backlog?

That is a very open statement. I think our customer clearly looks at the NPV of this project for them based on continuing in our current process, as well as the other options available to them. And we also have to be aware that our customer does entail the NLNG, part of the Nigerian government. And so they look at all of these things in a very holistic basis. It is not simply a straightforward financial outcome. But they do think about what are the implications regarding the overall energy policy within Nigeria's part of these discussions.

I say this based on how I would presume they are looking at it. I am not aware of specific discussions that our customers have had regarding their evaluation of the project or what changes may or may not occur. I am just simply offering you a third-party perspective of how I would expect our customer group to be looking at the continued execution of the project in light of what other options might be available to them.

Okay. Thank you.

Dan Pickering, Pickering Energy Partners.

Cedric or Bill, would you mind to talk through -- did we book any revenues for Escravos this quarter?

We did.

We did. We booked the $63 million of the unapproved change orders were booked.

Okay. As we step through the remainder of the year, it sounds like physically not a lot is happening. Are we going to -- are we basically in a pause in the project? I guess I am just trying to understand how this thing moves forward from here.

We are continuing to work at the site and we are working through issues to continue to get our labor camp constructed and get more people on site to do the work, which we hope to be able to make some better progress than we have in the past. We are continuing to make a lot of progress and are really on our targets for the engineering and procurement phase on the project. Now that is clearly offshore.

Onshore, we are getting ready to mobilize our project manager to the site and to really put forward the strong effort with our customers to make the progress. As we look out as part of our requirements under GAAP, we've looked at what those future costs may be and we think we will be able to recover those additional costs that we could identify today through the existing provisions of our contract.

Dan, on the revenue question, we obviously booked the change orders of $63 million, but the revenues for the project for the quarter were about twice that in total.

All right. So it was almost half of the revenues booked for that subsegment, is that correct?

It is also forward-looking. These weren't actually cast costs. These are projected costs, as you know, that we have to book mark-to-market and it is different than what the cash flow timing is.

Sure. Okay.

But your statement is right.

Okay. Then I guess, Bill, it sounds like you are redeploying some of your salesforce away from the gas monetization side. And I guess just in terms of sort of disengaging and reengaging in other areas, it sounds to me like your view is a number of these projects and opportunities, they are not slipping six weeks. They are slipping quarters and quarters. I am looking for a feel here in terms of if you are redeploying kind of a specialized work force, it says that we are a year plus in terms of delays on some of these gas monetization projects. Is that fair?

Dan, I think it is in the realm of possibility. We can't accurately project when the final investment decision and go-aheads will be given on projects from our customer group. We are doing a little bit more gating in terms of our salesforce. Instead of having separate pursuit and capture teams each focused on a single project, we are trying to get a little more efficiency and leveraging existing sales teams across more projects.

We do expect the NLNGSevenPlus to achieve its FID by the end of 2007. And we expect these others will continue to move forward. But their ultimate timing remains unclear for us. Certainly environmental permitting has become a tighter issue for our customer base. But I think we're seeing them delay and we are taking active steps to not become victim to just a single market and look for ways to find other work that if it comes in and meets our risk and return objectives, we will book that work. And we will continue to keep trolling on the gas monetization side.

Okay. And last question for me. When we look, I guess, at this -- your comments was you weren't satisfied with the results; you want to do better. It may take a little bit of time to redeploy, etc. I guess what I am trying to understand is if that's -- are you basically saying Q1 is where we're going to be in terms of profitability for the business for a while as we kind of transition back to more North American work, etc.?

I'm not sure we're going to give that kind of guidance.

Okay. I was hoping. Thank you.

Good try.

Jamie Cook, Credit Suisse.

Good morning. I guess my first question, getting back to exploring business outside of gas monetization, is there any way you guys can give us a feel for the potential pipeline of business out there in dollars? I'm just trying to get a feel for the opportunity that was missed and what the potential for business is going forward.

I think that we had attempted in our roadshows to quantify the various capital spending that exists in these different segments. Beyond gas monetization, you have the technology, the refining, the petrochemical, the chemical spends. And those are fairly readily available in the public domain. That is the market we're looking at.

Okay and we shouldn't be concerned at all --? I guess what types of processes do you have in place? Should we be concerned that focusing more on these businesses introduces new risk into your business model?

I don't think so. I think we've been very successful in implementing our business development oversight capabilities where we spend a lot of time really looking at what the risks are that we are seeking to undertake as part of a project. And I think while we are not looking to derisk the portfolio, we are seeking to more appropriately price those risks that we undertake. And from that decision, we will find out what the market will give us in terms of what projects meet our risk and return criteria.

So I don't see a change in risk. I think we've seen perhaps as evidenced in the work-off of some of the fixed-price work, but the continued creep on the reimbursable side of the business so that we're probably more successful in our risk and return in today's environment selling reimbursable work. That in part has been reflected in the fall-off in our revenue backlog.

I would also suggest that our man-hour backlog within KBR has not fallen near the degree as our revenue backlog, which is consistent with what you would expect to see as the business has evolved towards a more reimbursable mix.

To the extent we can sell work in today's very volatile environment at levels that allow us, from our perspective, to achieve an acceptable risk-adjusted rate of return taking into account this volatility, we could see the fixed-price part of the portfolio increase in subsequent quarters. But to date, we are trying to sell work that is acceptable to us. In the short term at least, it has been more on the reimbursable side.

Just sorry, my last question and I'll get back in queue, can you just expand a little? You mentioned in your press release and in your prepared remarks sort of the renewed focus on your legacy industrial services business. How big is that business today? What is the potential growth potential and profitability of that business?

I'll speak relatively as opposed to absolutely. We are, today, operating the industrial services business at 25% to 30% in volume and profits of what it was five years ago. And it was a fundamental movement from the Company at that time towards what were viewed as higher margin businesses. And as I've come in, I like the industrial services. I think it is not only a good business for us in terms of risk and return, but it also gives us some real strategic benefits in our other businesses. The example I'll cite is by having a critical mass of people performing plant operation and maintenance services, we are able to keep very talented people productively employed as they demobilize from some of our international projects, which is a benefit to us.

And secondly, we are able to cycle some of our engineering talent through the industrial services business as we do a lot of the plant and mill engineering work that gives us a greater appreciation towards the operability of our projects from an engineering standpoint than we would if we kept everybody in a home office, if you will. So we are very excited about some of the corollary benefits that provides us in addition to just the underlying risk-adjusted rates of return in that business.

Okay, I'll get back in queue. Thank you for your time.

Steven Fisher, UBS.

It sounds like the costs associated -- just on Escravos, it sounds like some of the costs associated with assessment and actual soil conditions is separate from civil unrest and site access, but it does like you're still confident you can recover those costs. I am wondering what discussions you've had with your client that give you the confidence you can recover some of those costs.

Well the provisions in the contract are very clear as it relates to the soil conditions. They had prepared the site. It is at some point designed to be load tested. And if there are additional costs that are incurred because of the site prep being outside of the standards that we agreed to in our contract on Escravos, there will be ability for us to recover those incremental costs as well. And that would go towards a different foundation design for example.

From our standpoint, the contract is very clear in that regard. We are trying to get the people on site, as well as the equipment to the site to begin the testing of the soil conditions. And we expect that over the coming months we will learn more about what the true soil conditions are, but we remain very confident that the provisions in the contract will allow us to recover any additional costs beyond what we've assumed based on the expected site conditions outlined in the contract.

Great. Then in terms of the strategy outside of Iraq and DML in the G&I business, wondering what types of work you're pursuing there. I think you had talked about some defense work in Korea and I saw that over the last couple of weeks CH2M just got a big contract there that you and some of the other E&Cs were bidding on. I am just wondering if there's still a role for you on that $11 billion Korea project and outside of that, what other types of projects are you pursuing.

Yes, we clearly were disappointed with not winning the Korea opportunity. It remains to be seen whether CH2M HILL will have a need for KBR in this project. If they do, we certainly would be open to a discussion. We have been successful in trying to diversify around the very good and unique skill sets that we've developed in LOGCAP III.

The most relevant example of that is our Allenby & Connaught project where we have entered into a 35-year contract with the UK Ministry of Defense with a value of about $16 billion to develop, design, construct, finance, own and operate facilities to support the Royal Tank Regiment in the United Kingdom for multiple sites within the United Kingdom. So it is a great application in a peacetime environment of what we are doing in Iraq.

And so we are continuing to look at ways we can diversify our G&I business. And I think there is a lot of opportunities that await us in these markets, particularly looking at what track record of skills and scale that we've established in the Iraq project.

Okay. Thank you.

Brad Handler, Wachovia Capital Markets.

My questions have been answered, thank you.

Scott Gill, Simmons.

Good morning, Bill and Cedric. Cedric, I've got an accounting question here. BRC had a $20 million charge that impacted the operating income line. Would we not have seen a $10 million favorable response in minority interest?

No, it is not consolidated, so equity method, that is our share. It is our investment actually of our share, as well as our services. And with that there is no tax benefit either due to the way the structure is to the UK holding company. Great. Then on the tax rate, you kind of guided the rest of the year to be low 40%. Can you -- what is your visibility for the '08 tax rate? '08 we would expect to come down in line with what we were thinking prior to BRC this year more in the high 30s.

Okay, great. And I guess my last very quick question on the Alice Springs-Darwin Railroad, according to the 10-Q, it looks like it impacted pretax profit by about $12 million. Should we expect kind of that same run rate for the rest of the year?

Well the pretax hit was about one-third of what you suggest for this quarter, but yes, for the balance of the year, we continue to have about an $8 million investment on our books that would be expected to come down through our share of the losses that are projected.

We've got time for one more question.

If that is it, then I think we are good for the call.

Thank you. That would conclude our question-and-answer session. At this time, I would like to turn the conference back to the speakers for closing remarks.

Thank you for joining us today. We appreciate your time and we look forward to the next quarter's call. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference call. You may disconnect at this time.