KBR Inc (KBR) 2007 Q4 法說會逐字稿

Good day, everyone, welcome to the 2007 fourth quarter earnings conference call hosted by KBR. This 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 prepared remarks. You will receive instructions at that time. For opening remarks and introductions I would like to turn the conference over to your host, Mr. Rob Kukla, director of Investor Relations. Please go ahead sir.

Thank you, Darryl. Good morning, and welcome to KBR fourth 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 fourth quarter results is available on KBR's website also. We have tentatively scheduled for our 2008 first quarter earnings conference call for Friday May 2, 2008.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer and Cedric Burgher, Senior Vice President and Chief Financial Officer. In today's call Bill will provide opening remarks and business outlook. Cedric will address KBR's operating performance, financial position, backlog and other financial items. We will welcome 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 actual results to differ from our forward-looking statements. These risks are discussed in KBR's form 10-K for the year ended December 31, 2007; KBR's quarterly reports on forms 10-Q and 10-Q-A and KBR's current reports on form 8-K. Now I will turn the call over to Bill Utt.

Thanks, Rob, and good morning everyone. As you saw in our press release and form 10-K that were issued this morning, I am pleased to have our new KBR business organization now based on the six discrete reporting units finalized. This new structure will provide increased transparency into KBR's businesses, both financially and operationally to our managers as well as our customers, employees, investors and analysts.

In terms of profitability 2007 was a record year for KBR. Net income for the full-year 2007 including discontinued operations was $302 million. Clearly eclipsing our previous high of $240 million in 2005. Consolidated KBR revenue for the full-year 2007 totaled $8.7 billion compared to $8.8 billion for the full-year 2006. The slight decrease in revenue was driven by lower Iraq related activities in the Government and Infrastructure business unit. However, revenue for each of the remaining five reporting units was up led by an 11% increase for upstream, a 15% increase for downstream and a 45% increase in technology.

Consolidated operating income for 2007 was $294 million compared to operating income of $152 million for 2006. Operating income in 2007 has significant contributions from the Pearl GTL project, the Yemen LNG project, our Kashagan offshore work and LNG Train 6 in Nigeria. Earnings for 2007 were $1.79 per diluted share compared to $1.20 for 2006.

Before discussing operational highlights for our services segments I would like to comment on our current portfolio of large lump sum turnkey EPC projects. These projects each remain profitable and are progressing according to their anticipated schedules. The Skikda LNG project is off to a good start and had a meaningful impact to this quarter's results. Tangguh LNG remains ahead of schedule, and EBIC continues to perform on budget and ahead of schedule.

In December we completed a production check estimate for Yemen LNG and the project remains on course financially and is progressing consistent with our schedule assumptions from the inception of the project. In January we announced the KBR's joint venture, TSKJ, successfully completed the construction and commissioning phases for the LNG Train 6 project on Bonny Island Nigeria. The project was completed on budget and ahead of schedule. The commissioning phase contributed to the remarkably fast startup and most importantly, the project achieved 10 million work hours without a lost time incident.

Now let me turn to some operational highlights for our services segments and updates on KBR end markets. With respect to our upstream business unit backlog is up 45% from last year due to the addition of Skikda LNG, various offshore engineering and feasibility studies and increased cost estimates for our large cost reimbursible gas to liquids projects. In regards to the LNG projects we still believe a possible announcement on NLNG Train Seven project in Bonny Island, Nigeria will be forthcoming in the early part of 2008, and a final investment decision for the Gorgon LNG project in Australia will be in the later part of 2008.

During the past several months upstream was awarded numerous offshore projects, particularly the [pass floor] FPSO project for Daewoo Shipbuilding in Marine Engineering Company. KBR will provide topsides engineering, procurement and interface design services for a processing capacity of 200,000 barrels per day of oil and 150 million cubic feet per day of natural gas. This project marks the fourth consecutive mega topsides and second new build FPSO we have done for DSME.

Through our ES joint venture with WorleyParsons KBR was awarded a $24 million project to provide detailed engineering, procurement management and construction management services for Woodside's Pluto LNG offshore production platform project. This project will entail a riser and gas export platform with the capability to transfer 1600 million standard cubic feet per day.

Also during the quarter our consulting group, Granherne, won an award to provide engineering services to Petrobras America and a topside and substructures concept and definition study for Woodside. The Skikda LNG project in Algeria ramped up significantly during the last quarter and was a significant contributor to this quarter's results. I am pleased with the offshore work and contributions to our results particularly in the Caspian area.

For Government and Infrastructure the protest by unsuccessful bidders on LOGCAP IV still creates uncertainty as to the timing and outcome for the transition from LOGCAP III to this contract. While the Army implements the GAO's recommended corrective action of the LOGCAP IV contract, we will continue to work under LOGCAP III providing quality services to the US military. We presently expect the Army to announce its re-award decision in the first quarter.

With regards to our Middle East operations, I was disappointed in the provisions taken in the fourth quarter related to our Middle East work for the US government for potentially disallowable costs incurred for activities dating from 2003. We recognize incremental provisions in connection with governmental audits and reviews. I am, however, very pleased with the continued strong performance by KBR's international operations as well as the improved performance in KBR's non Middle East US government business.

The services business unit continues to make outstanding progress in achieving the goals set for this unit. Backlog grew 176% from last year primarily driven by our ability to win domestic construction awards. Last quarter I mentioned there were several larger construction projects being pursued by KBR, and we had hoped to be able to announce several awards in the coming months. In November KBR announced the large Canadian Northwest upgrade project for construction and fabrication of a gasification unit for Lurgi. This is our second large award in the last six months for services in the Alberta oilsands.

We have been successful in other construction awards, as well, including a flair gas control project to upgrade plant flaring systems, and the construction of a new sulfur unit on an emission control, project both in the Gulf Coast area. For industrial services our strategy is to build on KBR's brand recognition, proven performance and outstanding safety record to protect and renew existing contracts and expand the service offerings we are provided under these contracts. This was evident as we successfully renewed or extended four contracts during the fourth quarter.

For our downstream business unit KBR's Ras Tanura and Yanbu export refinery projects in Saudi Arabia, along with the EBIC ammonia plant in Egypt continue to make good progress and were strong contributors to the fourth quarter's results. During the fourth quarter downstream was awarded in conjunction with the technology business unit, a contract by MAN Ferrostaal for an ammonia plant in Venezuela to provide basic and detailed engineering services for a 1800 metric ton per day ammonia plant. This marks KBR's fourth ammonia project with MAN Ferrostaal.

Downstream was also awarded a contract by PetroSA to conduct a prefeasibility study to build a 200,000 barrels per day crude oil refinery called Project Mthombo in Coega, Port Elizabeth in the Republic of South Africa. The prefeasibility study will focus on determining the economic optimum configuration for the refinery as expected to be completed in May 2008.

Our technology business unit reported an almost 40% increase in job income in 2007 over the full year 2006. During the fourth quarter technology had a number of significant achievements. On the MAN Ferrostaal contract in Venezuela mentioned a few moments ago, the technology business unit will also participate by providing KBR's proprietary KAAP ammonia process technology which will be the first plant in Venezuela to utilize this technology. This is KBR's seventh large-scale ammonia project utilizing KAAP technology.

In November KBR successfully met all contractual obligations related to an ethylene plant in China using KBR's SCORE ethylene technology. This is the first facility in China to utilize the SCORE technology.

Geographically I am pleased with the growth we are experiencing in our Jakarta engineering center both in terms of people and responsibility. The Jakarta office is a huge supporter for our work in Australia and should support the growth we see there for a long time. Now I will turn the call over to Cedric.

Thanks, Bill. I will begin with discussing some of the changes in our financial reporting structure. In the supplemental tables in our earnings release and form 10-K we are now providing by business unit, revenue, job income, overhead, total income, backlog and certain items included in operating income. Job income is profit directly related to projects before business unit or corporate overhead costs. Total business unit income no longer has a corporate G&A allocation. We believe the elimination of overhead allocations will give better visibility into our business and allow us to operate more efficiently.

On the consolidated statements of operations in the unallocated cost section you will see that there are two items called "labor cost absorption" and "corporate general and administrative." Labor cost absorption primarily relates to the unallocated cost of labor services above the amounts charged to our projects within our business units. As part of our reorganization we have moved a significant amount of overhead from the business units to corporate in order to achieve greater efficiencies and cost reductions. We have reclassified historical numbers so it is comparable for you.

To give you a sense of the magnitude of the reclassification you will notice that 2006 G&A is now reported as $226 million versus the $108 million for 2006 under the prior reporting structure. For the Government and Infrastructure and upstream business units we have provided a product service line breakdown. Several of these product service lines were previously disclosed in prior quarters, and we deemed it important to continue providing this information.

Now I will review KBR's fourth quarter 2007 results which primarily focus on year-over-year comparisons. Consolidated KBR revenue for the fourth quarter of 2007 total $2.4 billion compared to $2.3 billion in the fourth quarter of 2006. Consolidated operating income was $82 million in the fourth quarter of 2007 compared to income of $90 million in the fourth quarter of 2006. Operating income in the fourth quarter of 2007 included positive contributions from our gas monetization projects, the services business unit and Iraq related work. Offsetting this somewhat was a $22 million provision during the fourth quarter of 2007 related to potentially disallowable costs incurred under the US government contracts in the Middle East for activities dating from 2003.

Government and Infrastructure revenue in the fourth quarter of 2007 was $1.6 billion, flat compared to the prior year fourth quarter. Business unit income was $53 million in the fourth quarter of 2007 compared to $88 million in the fourth quarter of 2006. The fourth quarter of 2007 was impacted by the $22 million provisions I mentioned, as well as lower Iraq related work. The Allenby & Connaught project, the CENTCOM project and other international projects continue to make positive contributions to G&I's results.

Upstream revenue was $603 million in the fourth quarter of 2007, up $72 million from the fourth quarter of 2006. Business unit income was $64 million in the fourth quarter of '07, down slightly from the $67 million reported in the fourth quarter of '06. The decrease was primarily driven by declining activity on some of our large gas monetization projects such as Tangguh and Yemen, and completed fee projects that had little or no fourth quarter 2007 impact. Partially offsetting this decline was positive contributions from the Skikda LNG project, the pearl gas to liquids project and Kashagan offshore work.

Services revenue was $96 million in the fourth quarter of 2007, up $69 million from the fourth quarter of 2006 due to increased activity in Canada. Business unit income was $23 million, a $5 million increase from the fourth quarter of 2006 due to the start of work on the Scotford Upgrader project and an $11 million contribution from actuarially determined insurance adjustments. The fourth quarter of 2006 also included insurance adjustment of approximately $7 million. Partially offsetting the services year-over-year increase was lower activity on our maintenance vessels joint venture in the Gulf of Mexico.

Downstream revenue was $85 million in the fourth quarter of 2007, up from $69 million in the fourth quarter of 2006. Business unit income was $3 million in the fourth quarter of '07 compared to $5 million in the fourth quarter of '06. During the fourth quarter of '07 the Yanbu export refinery project, the EBIC ammonia project in Egypt and the Ras Tanura project made positive contributions to downstream's results.

Technology revenue for the fourth quarter of 2007 was $18 million, down $1 million compared to the fourth quarter of 2006. Business unit income in the fourth quarter of 2007 was $1 million compared to $6 million for the prior year fourth quarter. Contributing to the decrease was the delay and cancellation of two projects in the fourth quarter of 2007 which were awarded in 2006. Partially offsetting this decrease was the awarding of and work performed on an ammonia process project in Venezuela.

With respect to the Ventures units, business unit loss for the fourth quarter of 2007 was $3 million compared to a loss of $8 million for the fourth quarter of 2006. The improvement was primarily related to reduced losses on the Australian railroad project and increased profitability on the Allenby & Connaught investment in the UK.

Now let's review other financial items. General and administrative expenses for the fourth quarter of 2007 were $49 million, down $16 million from the third quarter of 2007 primarily due to reduced environmental, legal and acquisition due diligence costs. For the full-year 2007 general and administrative expenses were $226 million, flat versus the prior year. We expect general and administrative expenses for the full-year 2008 to be at least 5% lower than last year. Our effective tax rate in the fourth quarter 2007 was 44%, higher-than-expected primarily due to discrete adjustments including additional US taxes on some of our foreign subsidiaries. Our effective tax rate for the full-year of 2007 was 40% which exceeds our statutory US rate of 35% primarily related to the nondeductibility of foreign losses. For the full-year 2008 we expect our effective tax rate to be in the high 30% range.

Now I will discuss backlog. Total backlog at December 31, 2007 was $13.1 billion compared to $12 billion at September 30, 2007. Contributing to the sequential backlog increase was added work for our Middle East operations, the Canadian upgrader project award and the services business unit, and scope increases on various large gas monetization and offshore projects. Overall the backlog portfolio mix at the end of the fourth quarter was 72% cost reimbursable and 28% fixed-price, roughly the same mix as the prior quarter.

Now I will discuss our liquidity and balance sheet. At the end of December 2007 our balance sheet remains strong with no date and cash and cash equivalents of $1.9 billion of which $483 million is cash associated with our consolidated joint ventures, which leaves approximately $1.4 billion available for general corporate use.

Total cash balances increased by approximately $66 million during the fourth quarter of 2007. Our working capital at the end of the fourth quarter was $1.4 billion, flat compared to the prior sequential quarter. Working capital in Iraq was $242 million at the end of the fourth quarter 2007, down approximately $125 million from the sequential quarter due to improved collections.

In regards to the Pemex arbitrations, we had two significant developments during the past month. In early February we collected monies owed from Pemex related to the EPC 22 arbitration award. Our fourth quarter of 2007 results included the recovery of our investment in the note receivable for this contract, as well as $4 million in interest income. Later this month we received notice that the international Chamber of Commerce approved the arbitration panel's decision to award in favor of KBR on EPC 28 arbitration. While we are awaiting an official translation of the award, we understand that the net award in our favor exceeds $70 million, plus accrued interest since 2002, which exceeds the book value of our claim of $61 million.

Capital expenditures totaled $11 million, and appreciation was $11 million during the fourth quarter of 2007. For the full years ended December 31, 2007 and 2006 capital expenditures totaled $43 million and $57 million, respectively. This decrease primarily relates to the impact of our discontinued operations. Capital expenditures for 2008 are expected to be less than $70 million with our spending focused on the potential expansion of fabrication capabilities in our Canadian operations, a number of IT projects and various relocations, upgrades and maintenance on our G&I offices.

Now I will turn it back over to Bill for his final remarks.

Thank you, Cedric. 2007 was a year of transition for KBR. In April we completed our separation from Halliburton. During the course of the year we streamlined our portfolio and increased our focus on the business through the sale of the DML shipyard and Brown & Root-Condor engineering business, as well as through the conversion of the Escravos GTL project from a lump sum to a cost reimbursable basis.

KBR also completed a major reorganization during 2007. Our new six business unit structure brings increased focus and transparency to KBR's activities. Our managers, as well as our shareholders, analysts and other stakeholders will benefit from a clearer and closer focus on our business units. This will help KBR deliver better financial performance with less volatility in our results going forward. KBR's portfolio of projects is among the best in the business. We are continuing to deliver great results contributing to the success of our customer base.

Through this outstanding performance KBR is continuing to reinforce our reputation as the go-to contractor in our markets. Looking forward to 2008, we see excellent opportunities in all of our markets. We are continuing to improve the screening of our projects with an eye towards successful technical, as well as commercial execution. This will enable KBR to continue to drive margin improvements with lower earnings volatilities going forward.

KBR will also continue to identify areas where we can grow our business to improve the value of our competitive offerings to our customers. We are continuing to evaluate several good opportunities to deepen our market presence in several of our markets, as well as broaden our product offerings in other markets. We are also continuing to focus on our overheads and have taken steps to identify better the back office resources we employ. We will continue to take those steps during 2008 to drive and improve cost and operational efficiency across all of KBR.

And finally, I want to offer my perspectives on KBR's most valuable asset, our more than 52,000 employees. Our teams performed exceptionally well during 2007. We successfully navigated through a potentially distracting separation with our prior parent. We completed several successful sales and restructurings to position KBR for future growth. And we kept our eye on the ball, successfully delivering on critical project and service offerings for our customers.

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

(OPERATOR INSTRUCTIONS) Steven Fisher.

Thanks, first of all, for the additional disclosures. It is very helpful. Can you give some further details on Yemen and Tangguh? What is the percentage complete of the projects and actual timing expectations for completion?

Thank you for your comments. We certainly are very interested in keeping our disclosures very open and as transparent as we can make them. The Tangguh project is 89% complete in terms of construction progress. We are expecting in the second half of this year to have the first unit ready for startup and the second unit later four, five months after that. The Yemen project is 72% complete, and we expect that early '09 will be putting the first gas into the project.

Okay, great. And then related to the Macedonian embassy, did I see correctly there was another $2 million charge in the quarter and it sounds like it is 45% complete. What is the status of the project, and how comfortable do you feel about the outlook for it in terms of potential for further charges?

We did have some additional cost increase. There was a port closure and we had to work around it with airfreight that was the primary issue. Also some HVAC increased costs versus our expectations in prior estimates. Those are the main drivers. As we've said before, we are still I guess middle innings in this project. We are not through the woods. We have a lot of local labor that has not been as productive as we had initially planned. And so we are still planning to complete the project sometime in the middle of this year. And as we see it today we are working our way through the issues.

The provision we took was $1.2 million and because this is a loss making contract we are reforecasting the cost to complete every quarter. So the current estimate that gave rise to the $1.2 million provision in the fourth quarter does reflect our current thinking of the cost and schedule to complete the project.

If I could just do a quick one on LNG; you mentioned NLNG 7 and Gorgon I guess on the EPC side, are there any actual feed projects that you might be able to book in the next couple of quarters?

We see some feed activity out there. I know there are a couple projects that we are involved in previously that are making their way towards looking for their natural expansions. And we think we will clearly be a feed player on those projects. And then we are also keeping an eye open for some of the new projects that are being proposed. I know you all have done a fairly exhaustive study of what you see out there for the next two years. And I think your list is very consistent with our list.

Great. Thanks a lot.

Andrew Kaplowitz.

Good morning, guys. Can you give us a little more color on the $22 million charge on LOGCAP III? Was that just totally unexpected on your part, and should we see that as non-recurring going forward for the rest of contract? Or are those provisions still under review?

Well, I think there are two components to those charges. The first component and the largest, which I believe was around $15 million was the Fly America Act, where apparently as we interprete it the regulation we did not pick up some of the limitations related to co-chairs. That when we looked at flights originating in a foreign location and terminating in a foreign location, we thought we had a fairly good case for that and upon reflection we really I think missed that one. And so that was $15 million, and certainly the amount that was provided to us as a possible, unallowed cost by the DCA was much lower than the ultimate provision we took. And the ultimate provision that we took was based on our reading of the law and then looking at the entire -- as large a population of tickets that we could look at. So we think that is pretty much a onetime charge based on the extensive evaluation we did for the Fly America.

The other charges which were a little over $6 million were related to the dining facilities and we are continuing to have a dialogue with the DCAA on those matters. Some of these areas that they've raised claims on we clearly believe there is no liability. There are some other areas that we are looking into, and we think the provision that we took in the fourth quarter of a little over $6 million is consistent with our history in resolving some of these claims with the government on their proposed disallowed cost.

And also we are looking at withholding additional amounts from our subcontractors where some of the unallowed costs are related to their issues. But nonetheless we think the KBR liability that we've seen from what has been given to us in the fourth quarter is $6.3 million, and we think we've got some good arguments on it. But that could be a continuing issue for us. But we just will wait and see where DCAA goes on that.

But you took the total 22 million (technical difficulty) charge including that 6.3 million, right?

Yes, Fly America was about 15, and you had about 6.3 on the [defax].

Okay, great. Thank you. Just one quick question. Backlog in 4Q was pretty decent, and I see from mostly the E&C gas monetization portion. Can you just comment a little more on what contributed to that strong growth in the segment? And going award in 2008 do you see the biggest contribution to the new awards to be there or somewhere else, and I guess I'm looking for if LNG awards continue to get delayed, can awards in refinery, petrochemicals, oilsands pick up the slack?

We're continuing to look broadly in the industry. I think that we did see some appreciation in cost on the cost reimbursable projects as well as new awards during the fourth quarter. Clearly we are hopeful that we can get a continued increase in backlog on the gas monetization. But there are other opportunities we are looking at. We are particularly optimistic about our prospects for increased domestic construction work in the US. That was up sharply simply based on our commitment to that business and we are very committed to that business in that we believe a strong domestic construction business will allow us to be a better provider of EPC services internationally and allow us to take a bigger piece of the construction pie. To that is a very integral part of our growth for '08.

We also see a very active market in the downstream side; continuing interest in the refining petrochemicals and chemical side. We also see a lot of people talking about gas monetization -- excuse me -- coal monetization. And those are hit or miss largely because they are a little more exotic in terms of the projects that are being proposed there. But also in technology we expect to see that during '08 that by breaking out technology and running that as a stand-alone business it will drive a better performance if not from increased transparency but certainly an increased commitment by KBR to that business.

Okay, thank you.

Jeff Tillery.

I appreciate all the detail on the segment and subsegments. I just wanted to make sure I understand a couple of the pieces within G&I, if you look at '07 on a full-year basis the international business grew about 45%, and the Americas was down about 15%. I just want to understand some of the growth drivers and how you see those businesses playing out going forward.

Just to be clear, the international is really what you've seen before. It relates to our Middle East work primarily. It has international -- I misspoke, the Middle East work is the Middle East work you've seen before. We broke the other G&I that you've seen up into two pieces; international which includes Australia, a big business for us there and then the other government work. And if you look at our backlog across the board, all three units and all three groups within G&I experienced increases quarter-over-quarter. So we see good growth there.

I think in the Americas grouping you will see it is a whole lot of smaller contracts. The dot jock work both in Alaska and in the Continental US, as well as other work for other branches of the military such as the Navy under the CONCAP project. The international work again I think is pretty spread out; you've got Allenby & Connaught in there; you've got the Australian work which is a spread across a number of contracts, and you've got some work related to the UK, MOD and the Middle East as well in that international unit.

I would add that the Australia business is particularly strong for us right now. We are doing very well there and have been successful in virtually expanding our capacity within the Australia market by moving work out to Jakarta. And we are also benefited by the weaker dollar. And that has had a good effect for us in terms of the balance of currencies and the amount of work we are doing in the Australia and the UK market.

And my last question just around the previously issued guidance of $1.30 to $1.60 if I add back in the Middle East charge this quarter you are kind of at $1.40 run rate. Can you talk through the variables that get you to the high-end versus low-end of that guidance?

First off, we are not intending to update guidance quarterly, so this is not an update that way. There are a few items that I gave you some more information on like our CapEx and G&A estimates for the deer today. But we said our thinking back in December when we issued the guidance was one of the big variables, and this is what we said when we gave preliminary guidance I believe it was last July, one of the big variables is obviously the work in the Middle East, and you can almost handicap that as easily as we can depending on the activity level.

And today this year in '08 obviously also influenced by our market share with the LOGCAP IV. So I would say there is a whole, as you know in our business a whole number of variables that would be probably the biggest one as you think about the swing from the bottom to the top of the range.

All right. Thank you.

Jamie Cook.

Good morning. Just to build on a question that was asked earlier when we think about the potential for new awards outside of the gas monetization area, can you just talk about sort of -- we've seen some nice growth there but the projects have definitely been much smaller in scale. As you sort of move up the food chain and concentrate more on those projects are you bidding on larger projects that we could potentially see bigger ones outside of gas monetization in '08?

I think we are looking across all markets. There is lots of activity in the Middle East and the refining in the olefins area that we are anxious to examine for profitability. But we are also looking at our underlying work, and one of the aspirations we have is to continue to use our commercial business development oversight group to drive more, better commercial offerings on our projects. And we hope that is going to allow us to generate better margins is because we are going to do a better job on our contracting. But we do see actually more gas monetization projects out there today than we have the capability to execute.

So it is a delay of one or two is in some respects could be good news for us, because we won't have to turn down as much work. We are very interested and have been very active in the Caspian area. We've done a lot of work on projects called ACG and [shadinese] and we think we are in a good position to be a major player in the oilfield development of Kashagan, which by many estimates could be as much as $130 billion. I think if -- we are hoping to get a very small share of that business simply because of the vast size that we see there. And so the opportunities are out there for us, and we are going to grow systematically and thoughtfully the other businesses that you are now perhaps only getting a glimpse of in technology and particularly our services business. And are optimistic that we will be able to have as a continually very good growth curve in both of those business units.

And I guess can you just give a little more color, I think you mentioned in your prepared remarks on the G&A side being able to I think reduce that on a year-over-year basis at least 5% sort of. Can you give a little more color on what you are doing to reduce the G&A, and I guess what is well 5% seems like the low-end; what is the potential, what range would be the potential for upside there?

On the G&A side there was as I mentioned, a significant amount of costs that we moved out from the business units into the corporate kind of shared pool, if you will. That is primarily finance and legal and IT. I think those will be the areas, finance and IT particularly that will be looking kind of back office that we can do on a shared basis more efficiently than the two business units or formally three business units, now six, could do by replicating a number of functions. Implicit in that are a number of IT projects. It is why you see some of our capital spend up a little bit.

We have our SAP installation that we have installed over the last two years that we are continuing to work through to maximize the impact of that installation. There are a lot of manual processes still. There are a lot of things that were not in SCOPE in the original installation that we are bringing into SCOPE. This is not just an '08 exercise either; I'd say '08 and '09 will both be years of heavy emphasis on making those systems projects happen and getting manual efficiencies converted. We are trying to eliminate a lot of work.

I talked about the elevation of overheads. You would be surprised how many man-hours are dedicated to allocating on overheads when you do that. So we are just trying to get simpler in our business, execute IT projects and then we think we can with that we think this 5% is a very achievable objective.

Okay, but you said at least 5%. Could it be 10%? Is that too high? Is it (multiple speakers).

10% in one year is aggressive, I think over time our aspirations in that area certainly like I said '09 will continue to work through it. We also are trying to factor in when you do some of the reductions there are onetime charges due to restructuring or severances and so on. And so we will have to overcome that in order to achieve our 5% targets.

Thank you. I'll get back in queue.

Barry Bannister.

I can tell you are excited about the quarter and your cash build and working capital look excellent. I know you are restricted somewhat on the terms of the Halliburton spend, but could you talk about the potential for a buyback?

Obviously we are having I think good success in our focus on the balance sheet, return on capital and turning lazy assets into cash. The Pemex arbitration I mentioned happened after quarter end, and we have had good success throughout the year and just good cash from operations. And I would also speak to the reduction of risk in our business and the smaller number of surprises. So we intend to continue to focus on cash and cash generation. Puts us in a better position to grow the company as well as look at other alternatives.

If you notice an 8-K we filed in January, we did achieve an amendment to our banking facility that now allows us -- that was one of the governors to our ability to do anything in terms of buybacks or dividends -- so now we have a $400 million cumulative amount that we can do under the agreement. We still have the two-year tax sharing agreement in place with Halliburton that expires in April of '09, that limits us to less than 5% of our shares in terms of a buyback. While we are looking at what we could do with cash on all fronts and we are looking at it on an equal footing, I will tell you that we have seen a lot of encouraging ideas out there on the acquisition front.

I guess the silver lining with the market downturn and the thoughts about recession and so on is twofold. One, I don't think we see it in our business, commodity prices are still very high and it drives a lot of our business. $90 plus dollar oil prices and so on. And secondly, it brings down the potential cost of acquisitions that we would look to make. So I would say that is the front that we are probably more active exploring at the moment.

Okay, and as far as the cycle goes from your vantage point, given there has been so much strength in upstream, such as LNG, the oilsands and FPSOs, could we prolong this cycle as we transition to momentum in Saudi refineries, such as [revig and jubail] have been going forward so that bodes well for Yanbu as a red sea outlet. NNPC is talking about a refinery with CVX and XOM as potential partners, and you already have a Lagos office. And you are the project manager of Dow Aramco, and that is over a $20 billion project. And you obviously want a piece of that. So when you think of this cycle -- could we transition from an upstream focus to a downstream focus and then play on the strength of KBR?

I think the downstream will continue to be strong for the reasons you articulated. But as we look out even with delays in the or possible delays in the LNG side you still have a huge amount of money that will need to be spent on the offshore side to be able to meet the demand for hydrocarbons on a global sense. And I think maybe we are seeing the free markets serve as somewhat of a regulator in terms of the number of projects going forward because of the direct or indirect pushback on the supply chain escalations. But we think from our perspective we are going to see good markets upstream and downstream.

Part of our thinking in creating the two distinct business units was not to allow ourselves to be overwhelmed by LNG, for instance, which is what we thought was happening a couple years ago. And to give us a basis with which to follow two markets very closely and to be able to make resource allocation decisions based on what is best for the shareholders of KBR. And because we have the two business units I think we have better optionality to move back and forth between those two markets, based on the opportunities that we see.

Thanks a lot.

Brad Handler.

Could you please offer a little bit more color on the current status of LOGCAP IV? I heard your comments, Bill, I am just not quite sure I -- I am not quite sure I understood them in the sense that I didn't know if the Army was had accepted the GAO's recommendation, or if it was rebidding or that is a decision that is going to be made in this quarter? Just come back to that, please.

I am not sure how much enlightenment I can give you as the Army has taken the comments from GAO under advisement. We believe they are reviewing the situation within the Pentagon. We are not part of the discussions, and when we make comments about the expectation in the first quarter for a LOGCAP IV determination, it is based on what limited information we have, and I will tell you it is very limited. It is possible that the LOGCAP IV award could be delayed further. We don't know. We certainly believe that KBR has benefited by a continued delay just based on 100% share of LOGCAP III compared to an unknown share in LOGCAP IV, although we think we have a good share of residual work in LOGCAP IV. But we are really waiting as you are, and in some respects no news is good news for us, and with respect to LOGCAP IV.

Understand. If I go back to last quarter, there was I think if I understood it, a sense of perhaps a new set of audit personnel, perhaps, or so the awards, the bonus fee process was a little bit -- I guess the outcome was a little bit below our expectations last quarter. Can you revisit that for us here? Have you gotten some recent bonus awards, and how have they gone?

Are you talking about with the LOGCAP?

Yes, on LOGCAP III.

I think, Brad, what you are referring to is that the accounting for changed in the middle of LOGCAP III, so it would be a change that would apply to LOGCAP IV, which is basically that you would not accrue award fees as we have under LOGCAP III. And we continue to. But under LOGCAP IV we would not book those until they are awarded. And since those award fee boards are typically every 6 to 12 months, it could be pretty lumpy in terms of the impact of when those fees would hit.

Okay and actually --

(multiple speakers) we are accruing at 80% expected, which --

That's right, we are still accruing at 80%. That hasn't changed.

And was that simply an accrual choice, or was there actually a couple of reviews which where you only got goods or very goods as opposed to excellent --

We were accruing two quarters ago -- you've got a good memory -- at about 82%. We brought that down based on some more recent award fees in the 80% area. We have another award fee board that happened in January we're still waiting to hear the results on, but no, we still have very, very high marks. Most of our award fees are in the excellent, very good is a low rating for us and that is what had happened in a few awards late last year.

We typically see new orders who are on a one-year rotation, so having new auditor is common for us. It is nothing unusual from our perspective although we have to educate and indoctrinate the auditors on what we're doing, and then they have to prosecute their award fee evaluations.

Okay, that color helps, too, If I could switch gears a little, I don't know if you've addressed some of this in the K. Forgive me if that's true, but given that what you know about your backlog in perhaps in gas monetization and services, could you give us some color on a revenue outlook for '08? In those two divisions perhaps?

Services and gas monetization? In gas monetization we believe that we're going to get into the a very high revenue period on Skikda because of the S curve that we see and we expect to see a lot of revenue there. Conversely we are approaching the tails on both Tangguh and Yemen; but Tangguh and Yemen are both joint ventures so that is equity accounting. Skikda is fully consolidated.

EBIC is approaching the top end there, so it is -- we are optimistic given the robustness in the market and some of the projects that we are looking at we'll be able to continue to see positive movements upstream. We hopefully want to certainly preserve the backlog and if possible increase it. Services will we expect to see a continued momentum. We like our position in doing the construction in both Canada as well as the Gulf Coast; we've had some really good success getting back out into the Gulf Coast more actively in the last six months than we have been in quite some time.

We also believe the industrial services business is going to continue to pick up traction and gain expanded scope and possibly a few new contracts during the year. So it is -- we are pretty optimistic about the prospects in services because that in my perspective is an area of renewed focus for KBR getting back to some of our more legacy business that over the past years had just sort of been less emphasized previously.

Fair enough. Just with the backlog growing as dramatically as it has I don't know how far that extends; is it possible we could see 50% or more revenue growth in services? I recognize it is a fairly small division but is that maybe one of the stronger percentage growers this year?

I think if we were looking at our portfolio, we think services should be able to have the best opportunities within our six business unit portfolio for growth.

Right, okay, helpful. Thank you, guys.

Darrell, we have time for one more question, please.

John Rogers.

I guess just real quickly in terms of the way the year lays out in '08, you talked about some of the things that could move backlog around and I know Pemex can come in there. But is there anything else we should be thinking about the way the year lays out? Is it going to build through the year, are we going to stay at the current run rate and kind of hold through this year? In terms of operating income on the E&C side?

I think if we focus on operating income we spend a lot of time working through a more strict commercial involvement of KBR into our bids. And I think we are going to see further improvements in margins because of that. On one hand we are at a better market selling better commercial arrangements and at the same time we are also working off older projects at lower margins and lesser commercial areas. We think there is, as we've completed the study or are getting ready to complete the study on some of the refining work at Yanbu, that the investment decision that will be taken in May we expect that project will go forward and allow Yanbu to be a continued positive contributor to the KBR mix.

Likewise our activities on Ras Tanura look like they were going to ramp up during 2008 as we get deeper into the PMC work and begin really getting our arms around and also with our customers, the full-scale of this project that is going to be the world's largest onshore construction project when it gets into the field.

Okay, and Bill, that is in terms of absolute operating income, I assume as some of these projects ramp up there is more pass-through revenue that flows through, too.

Yes, I'm speaking of operating income. Because if the margins, the margins on our services that we provide we should see an upward trajectory from where we've been.

Okay, great. Thank you.

Thank you, ladies and gentlemen for joining us today; we look forward to having you join us for the first quarter call on May 2. Have a great day. Thank you.

Once again, ladies and gentlemen, this will conclude today's conference; we thank you for your participation. You may now disconnect.