KBR Inc (KBR) 2010 Q1 法說會逐字稿

Good day, and welcome to the KBR first-quarter 2010 earnings 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 call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead.

Thanks, Brandon. Good morning and welcome to KBR's first-quarter 2010 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.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, Senior Vice President and Chief Financial Officer. In today's call, Bill will provide operating remarks and business outlook; Sue will address KBR's operating performance, financial position, backlog and other financial items. We will welcome questions after we've completed 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, 2009, KBR's quarterly report on Forms 10-Q, and KBR's current reports on Form 8-K. Now, I will turn the call over to Bill Utt. Bill?

Thanks, Rob and good morning everyone. From an earnings perspective, I was disappointed in KBR's first-quarter results. However, I feel the earnings shortcomings was more the result of timing issues as opposed to unexpected costs or slowing of KBR's business. From an investor perspective, KBR's international lump sum turnkey EPC project frequently do not cooperate with smooth and efficient financial reporting. Let me elaborate. For the Yemen LNG project, train 2 achieved ready for start-up on March 12th, and care, custody and control of the Yemen LNG project has been turned over to the client.

During the quarter, KBR booked additional provisions for subcontractor claims resulting in a $6 million loss. Also, during the quarter, we achieved agreements with the client on change orders to recover prior provisions related to schedule liquidated damages, as well as subcontractor claims; however, we were not successful in concluding these changeovers during the quarter. We believe these change orders will be concluded and recognized next quarter.

At the Tangguh project the client is operating the LNG plant and both LNG trains are producing LNG for shipment. However, as a result of our client's sales commitment for LNG, KBR was requested to delay performance testing of the LNG plant, which would require a shutdown of the LNG trains. As with the Yemen LNG plant, KBR has fully provisioned the expected level of [schedule LDs] and subcontractor claims.

KBR is also discussing with the client change orders to close out the project that would provide recoveries or prior schedule LDs as well as subcontractor claims. We believe these change orders will be concluded during 2010. The Tangguh project did not impact KBR's earnings during the first quarter. Also, during the first quarter, KBR saw LogCAP revenues fall $553 million from the prior-year first quarter. This decline was not unexpected and is consistent with the announced decline in troop counts in Iraq. Also, KBR continued to transition its operations in Afghanistan and expects LogCAP activities in Afghanistan to cease by the summer.

During the quarter, KBR did not recognize any award fees from the LogCAP contract. This represents an estimated $0.05 per share impact during the quarter. During the first quarter, Award Fee Boards were convened for the period May 2008 through August 2009. We expect to receive the results of this Award Fee Board determination during the second quarter of 2010.

During the 2010 first quarter, KBR did have several business units that reported improved results over the 2009 first quarter. The hydrocarbons business group revenue was up 4% with job income up 5% over this period. Within the infrastructure government and power business group, the international government and defense and power and industrial units reported job income growth of 29% and 56% respectively over the 2009 first quarter.

Services job income was up $1 million for the first quarter despite a $60 million decrease in revenue from the 2009 first quarter. Corporately, we continue to work hard to manage our corporate overhead expenses, which were flat compared to the same quarter of last year.

I would now like to make some comments on several of KBR's discrete business units. For our gas monetization business unit, the Gorgon LNG, Pearl GTL and Skikda LNG projects were positive contributors to this year's- to this quarter's results. The Inpex (inaudible) FEED and the Pluto 2 and 3 FEED, as well as the Browse LNG basis of design projects are proceeding as planned and also contributed nominally to the quarter's results. Also, during the first quarter, KBR was awarded additional scope on the Pluto 2 and 3 project for procurement services of long lead items for the Pluto 2 segment of that project.

For our oil and gas business unit, work continued on a number of FEED projects and we expect to convert these FEEDs into detailed design during 2010. Additionally, KBR recently announced the acquisition of Houston-based Energo Engineering. Energo expands KBR's offshore capabilities in the areas of integrity management and advanced structural engineering. Energo's advanced structural engineering capabilities include specialty hurricane, earthquake, ultimate strength and blast analysis and design.

For our downstream business unit, EPC packages have been received on the Yanbu project. Regarding the withdrawal of ConocoPhillips from the Yanbu project, it is KBR's current understanding that this withdrawal may delay commencement of construction activities by one month. Separately, FEED activities continue on the Ras Tanura integrated project.

The two refinery projects in Africa continue to move forward. We expect the first phases of the EPCM for the Lobito refinery project in Angola will move forward during the first half of 2010. We also expect FEED activities to commence on the Petro-SA refinery project later this year as well. I continue to be pleased with the technology business unit's performance with revenues up 50% and job income up 33% compared to the 2009 first quarter. During the first quarter, technology signed a collaboration agreement with BP to promote, market and execute licensing and engineering services for the slurry bed residue and coal, Veba Combi-Cracker or VCC technology.

As a result of the increased level so professional services in KBR's backlog related to our recent awards, during the first quarter KBR expanded it's primarily hydrocarbon-based technical staff by 586 people or approximately 10%. For our North American government and defense business unit, I previously commented on the impacts of the continued reduction of troops in Iraq, and the transition of KBR's LogCAP III activities in Afghanistan.

In early March, KBR was awarded its first task order under the LogCAP IV contract to execute core logistic support services, theater transportation mission, and postal services in Iraq. KBR booked approximately $100 million to backlog on this initial LogCAP IV logistics task order. We expect full transition from LogCAP III to LogCAP III to occur over the next 120 to 210 days.

Also bids for Iraq-based life support services are due to the customer by the end of April. Finally, the third-party protests on the Turkey Spain base operations contract awarded to KBR was rejected and transition activities are expected to get underway shortly.

KBR also realized several favorable evolutions on legacy LogCAP III contract issues during the quarter through a series of favorable judicial determinations around our protections under the Defense Base Act and political question doctrine, support from the UK Ministry of Defense and former officials in the US Department of Defense in response to active and threatened litigations supporting KBR assertions regarding our responsibilities as a contractor on the battlefield, as well as the seating of senior Department of Defense panels designed to break the log jam and facilitate settlement of legacy LogCAP issues.

KBR's charges for the quarter related to these legacy LogCAP III issues totaled $10 million. We believe that charges such as these to resolve LogCAP III issues may continue for the balance of 2010. The international government and defense business unit performed well compared to last year's first quarter as we continued to support the UK Ministry of Defense on several projects in Afghanistan and on the Allenby/Connaught project. Our infrastructure minerals business units saw results fall from the prior quarter, as well as last year's first quarter, as global infrastructure spending continued to contract.

The power and industrial business unit generated 55% growth in job income over last year's first quarter and benefitted from increased work on an activated carbon project in Louisiana and a waste-to-energy project in Palm Beach, Florida. KBR's services business unit performed acceptably during the quarter, led by an active quarter for rewards at our building group. During the quarter building group was awarded a $47 million contract by the US General Services Administration, a contract by the Medical College of Georgia for a new $112 million school of dentistry, and a $52 million contract by the State of North Carolina Department of Health and Human Services.

Services was also awarded a contract to provide instrument and electrical support services for capital projects, turn-arounds and continuing maintenance needs to Shell's chemical plant in Deer Park, Texas, and its refining joint venture facilities with PMI Norteamerica.

In Canada, services was awarded a contract by International Alliance Group on behalf of Consumer's Cooperative Refineries to provide fabricated pipe spools for an industrial facility in Regina, Saskatchewan. Also in the first quarter, services mobilized on 16 new sites for DuPont for an award that was announced last quarter.

After Sue's comments, I will comment in more detail on the market outlook for our business before turning the call over to questions. Sue?

Thanks, Bill. I will review KBR's consolidated first-quarter 2010 results, which primarily focuses on year-over-year comparisons. Consolidated KBR revenue totalled $2.6 billion in the first quarter of 2010; a $569 million or 18% decrease from the prior year first quarter. Over this time period, the North American government and defense revenue declined $553 million or 35% primarily related to a 27% reduction in troop levels on our Iraq-related services.

Revenue in our technology business unit increased 50%, international government and defense increased 34%, downstream increased 18%, and gas monetization increased 3%. Consolidated operating income was $99 million in the first quarter of 2010 compared to operating income of $144 million in the first quarter of 2009. Net income attributable to KBR for the first quarter of 2010 was $46 million or $0.29 per diluted share compared to $77 million or $0.48 per diluted share for the prior-year first quarter.

The first quarter of 2010 net income was impacted by lower year-over-year volume on LogCAP III work, the absence of award fee income accrued on LogCAP III which impacted earnings per diluted share by $0.05, and decreases in gas monetization job income. Gas monetization revenue was $675 million in the first quarter of 2010, up $19 million from the first quarter of 2009. Job income was $53 million in the first quarter of 2010 compared to $65 million reported in the first quarter of 2009. Job income for the first quarter of 2009 was positively impacted by the reversal of accruals totalling $16 million on completed EPC projects, which did not repeat in the first quarter of 2010, lower activity on the Pearl GTL project, slower activity on the Skikda LNG project, and the absence of incentive fees on the Escravos GTL project.

Partially offsetting the job income decline was increased rev- or increase Gorgon LNG project on focus shifted from FEED to EPCM services and several LNG FEED projects. Oil and gas revenue was $84 million in the first quarter of 2010 compared to $95 million in the first quarter of 2009. Job income was $16 million in the first quarter of 2010 compared to $18 million in the first quarter of 2009, which included a net $7 million charge to an unfavorable arbitration decision related to the In Amenas project and several small one-time gains.

The decrease in job income primarily relates to several technical services projects that were either complete or near completion at the end of the first quarter of 2010. Also, the first quarter of 2010 included $3 million in additional costs related to [GBA] restructuring and legal costs related to the upcoming hearing on the Barracuda-Caratinga bolts arbitration.

Downstream revenue was $133 million in the first quarter of 2010, up $20 million or 18% compared to the first quarter of 2009. Job income was $22 million in the first quarter of 2010 compared to $6 million in the first quarter of 2009. The increase in job income primarily relates to increased work on the Lobito refinery in Angola and several petrochemical projects. Also, the first quarter of 2009 was impacted by additional costs related to the commissioning and start-up of the EBIC ammonia project.

Technology revenue was $30 million in the first quarter of 2010, up $10 million or 50% compared to the first quarter of 2009. Job income was $12 million in the first quarter of 2010 compared to $9 million in the first quarter of 2009. The increase in job income primarily relates to several refining technology packages for a facility in Angola and a new ammonia project in Turkmenistan.

North American government and defense revenue in the first quarter of 2010 was $1 billion compared to $1.6 billion for the prior-year first quarter. Job income was $36 million in the first quarter of 2010 compared to $74 million in the first quarter of 2009. The decrease in job income was related to no award fees in 2010 compared to approximately $21 million in the prior-year first quarter, and lower overall volume on the LogCAP III project which impacted job income by $14 million.

International government and defense revenue in the first quarter of 2010 was $94 million compared to $70 million for the first quarter of 2009. Job income was $18 million in the first quarter of 2010 compared to $14 million in the first quarter of 2009, an increase of 29%. The increase in job income was primarily related to increased contingency, logistics, operations and maintenance services for the UK Ministry of Defense.

Infrastructure and minerals revenue in the first quarter of 2010 was $73 million compared to $86 million for the prior-year first quarter. Job income was $18 million in the first quarter of 2010 compared to $24 million in the first quarter of 2009. The decrease in job income was related to the completion or near completion of several water projects in Australia and the UK.

Power and industrial revenue in the first quarter of 2010 was $97 million compared to $104 million for the prior-year first quarter. Job income was $14 million in the first quarter of 2010 compared to $9 million in the first quarter of 2009, a 56% increase. The increase in job income primarily relates to increased activity at an activated carbon project in Louisiana.

Services revenue was $415 million in the first quarter of 2010 compared to $475 million in the first quarter of 2009. Job income was $37 million compared to $36 million for the prior-year first quarter. The increase in job income was driven by increased activity on the Scotford Upgrader project in Canada, which was partially offset by reduced work volume at some industrial services sites.

Ventures job income in the first quarter of 2010 was $9 million compared to $8 million for the first quarter of 2009, which benefited from $8 million in income on two rogue projects related to favorable UK tax rulings. The increase is primarily related to improved financial performance at the EBIC ammonia project.

Now let's review other financial items. General and administrative expenses for the first quarter of 2010 were $49 million, flat from the first quarter of 2009. Sequentially, the corporate G&A was down $11 million, primarily related to lower tax consulting and legal costs and a $4 million write-off of the Westside Campus in the fourth quarter of 2009 that did not repeat in the first quarter of 2010.

For the full year 2010, our current estimates for corporate G&A expenses remain in the $230 million range, driven by general wage adjustments and expenses related to enhancing our IT systems.

Our effective tax rate in the first quarter of 2010 was 36%, which is slightly higher than our statutory rate of 35%. We continue to expect the full year 2010 effective tax rate to be approximately the US statutory rate of 35%.

The backlog as of March 31, 2010, was $13.3 billion, up 5% from a year ago March 31, and down 5% compared to the sequential quarter. Contributing to the sequential backlog decline was gas monetization, which declined $485 million from normal project work-off and modest declines across the IGP business units. Services backlog was up during the first quarter of 2010 bringing a 49% growth in backlog for services over the last two- over the past two quarters.

Overall, the backlog portfolio mix at the end of the fourth quarter was 81% reimbursable and 19% fixed price, approximately the same mix we reported from the sequential quarter.

Next, I will discuss our liquidity and balance sheet. Cash flow from operations for the first quarter of 2010 used $5 million, which includes an approximately $95 million increase in working capital primarily due to the timing of payments associated with Iraq-related activities. This is a timing difference, which has reversed, in the second quarter of 2010. In addition, our Skikda working capital decreased by $24 million in the first quarter of 2010.

Already in the second quarter of 2010 we have received from- payments from the customer which begins our anticipated 25% reduction of working capital on this project, which we anticipate, will occur over the remainder of 2010. At the end of March 2010, our balance sheet remains strong with cash and cash equivalents of $908 million, which net of $264 million of cash associated with our consolidated joint ventures was approximately $644 million.

During the first quarter of 2010 we had capital expenditures of $14 million. We invested $20 million in the BP VCC technology, which Bill mentioned earlier. We bought back approximately $1 million in shares and we paid $8 million in a quarterly dividend. In addition, in the second quarter of 2010, we closed a $16 million acquisition of Energo Engineering.

Also, on the balance sheet you will notice two new entries for current and noncurrent non-recourse project financed debt totalling $105 million related to our fast-track project, a variable interest joint venture entity that operates and maintains a portion of the British Army's heavy equipment transport fleet. Effective January 1, 2010, upon the adoption of FASB ASC 810, we determined that we are the primary beneficiary of this project entity and therefore we now consolidate this joint venture for accounting purposes.

Before turning the call over to Bill, I would like to recap a few of the financial items in the quarter. The first quarter of 2010 results include an estimated impact of $0.05 per share related to the absence of award fee accruals for the LogCAP III project, an approximate $10 million impact on accrued costs on existing legal issues and unallowable costs on the LogCAP III project and $3 million in costs in the oil and gas business unit for restructuring at GBA and legal costs related to the upcoming hearings on the Barracuda-Caratinga bolts arbitration.

When comparing the first quarters of 2010 and 2009, there was a net $12 million negative impact related to foreign exchange and interest income net of expense primarily related to lower cash deposit rates, higher credit facility fees and the result of generally strengthening US dollar. We also expect capital expenditures to total $55 million for the full year 2010.

We remain comfortable with the full-year 2010 guidance range of $1.50 to $1.80 per share, which we updated on last quarter's conference call due to the changes in the LogCAP III award fee accruals. And now I'll turn the call back over to Bill for his final remarks. Bill?

Thanks, Sue. I'd like to provide KBR's outlook for our businesses. In our gas monetization business unit we continue to see our most attractive markets in Australia. We believe we are competitively positioned to win additional new work on the Inpex, Pluto 2 and 3, and Browse LNG projects over the next two years. We are less bullish on Africa and other markets as we see a slower development of these opportunities, which are generally expected to lag behind developments in the Australia market.

In our oil and gas business unit we continue to see a strong level of global activity. As mentioned earlier, we are looking to turn several FEED studies into detailed design during 2010 and are positioning our offshore business to move deeper into project delivery from our recent focus on engineering services. We also see several excellent opportunities in the Caspian and West Africa regions that we hope will add to our backlog over the next 18 months. Additionally, given KBR's unique expertise in both hydrocarbons, as well as working in Iraq, we feel we are competitively positioned to win additional hydrocarbon work associated with the rebuilding of the Iraqi oil sector.

Our downstream business unit expects to see continued recovery of spending in the Middle East evidenced by the expected near-term commencement of construction activities on the Yanbu project and the continuation of the Ras Tanura FEED project. KBR also expects to move into the next stages of development on our African refinery projects during 2010. We are also seeing an uptick in activity in many of the markets served by our technology business unit, which typically is a leading indicator of future volumes of engineering and construction work in the downstream sector.

Overall, we continue to see margin pressure throughout our hydrocarbons business as our customers continue their efforts to drive down margins and costs at every part of the value chain. Additionally, we are seeing very aggressive bidding behavior as companies seek to rebuild their backlogs to more comfortable levels.

For our government and defense business units, troop with- drawdowns will take place as scheduled in Iraq. We expect to complete our LogCAP activities in Afghanistan by the end of the summer, but will still see activity in Afghanistan primarily through our international government and defense business unit supporting the UK Ministry of Defense and NATO forces.

We are also seeing several interesting nondefense opportunities arising at both our North American and international government and defense business units with other nondefense customers, as well as new defense customers throughout the world.

Fuel switching environmental concerns in the US power markets are driving a higher level of proposal activity for our power and industrial business unit. We are looking for an increased level of awards on gas-fired power plants and environmental control projects during the second half of 2010.

While our services business unit has seen a good series of awards in our building group, the US and Canadian construction and maintenance business remains mixed. On the positive side we are seeing a continued strong level of activity in our maintenance and small capital projects businesses. We are seeing signs of increased activity in the Alberta oil sands region. We are seeing some renewed activity in the US construction market, generally on small to midsize projects. We are not yet seeing a return of larger domestic construction projects.

Overall, I would expect services backlog to remain flat to slightly growing during 2010.

So as I conclude my comments on KBR's 2010 first quarter, I feel that the quarter was impacted by timing issues on several projects and I believe these issues will be sorted out and successfully resolved during 2010 so as to permit KBR to meet its 2010 expectations.

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

(Operator Instructions). We will now take our first question from Stephen Fisher with UBS.

Hi, good morning. Just wanted to follow-up and understand the interest expense dynamics a little bit better. I know, Sue, you mentioned the debt coming on the balance sheet, but how does that drive the interest expense that you reported? I think it was a net of $4 million in the quarter. Should that be kind of the quarterly run rate going forward and how does that translate to an interest rate?

It's actually- let me sort out some of the comments, Steve. It is primarily fees related to the new revolver, so we're amortizing the fees that were associated with that and that is actually the biggest piece of that. So the actual interest expense is actually a very small piece of that on the revolver, so the majority of it is actually funding fees and origination fee amortization on the new credit facility.

Okay. So is this the run rate that we should expect on a quarterly basis for the rest of the year?

Yes, I think that's correct.

Okay. And then, I guess, a broader question, still with the first quarter run rate below the annual guidance, you mentioned a number of things that you expect later in the year, what are the most important things that has to- have to happen in order to ramp up to that guidance, where are you more confident and kind of where do you see the bigger risks at this point?

I think the two change orders, Steve, I alluded to are really at front and center for the gas monetization business. These are change orders that we expect to be $0.15 a share or better each. I think the Yemen change order is probably a little bit ahead of the discussions on Tangguh, but the discussions have been cordial with the customer, and I think it's a matter of time before we get the final documentation in place.

We also are expecting to see the award fees come in. We have a big chunk that's out there in the second quarter, based on the Award Fee Boards that were convened in March. As you recall, we took- because of the actions on the period from January '08 to April '08, our ability to reasonably estimate those fees changed and so we had to take the provisions at the end of last year and we're looking to see some of that award fee come back in, we believe, in the second quarter. But during the course of the year you could see some fairly large lumpy award fees, perhaps one around midyear and maybe one towards the end of the year, hitting the KBR P&L and I think we'll have- probably continue to see some continued resolution of legacy LogCAP issues that might offset those two.

But those are the four things that I think that we're looking at here as being areas that we want to focus on and make sure we manage appropriately to achieve our expectations.

And if you got a favorable decision on the award fees this quarter, would that change the way you're currently accruing the LogCAP III for the rest of the work that you have there?

No, I don't think it would change the accrual. We're getting ready to transfer the LogCAP IV scope and that contract is not grandfathered from the accounting pronouncements that came out recently at- in contrast to LogCAP III that was. So as LogCAP III tails down and we move on to LogCAP IV, we wouldn't even have any opportunity to do that. But I think we'll- I think we're prudent, given the environment we're in, to recognize those as awarded.

Okay, thanks a lot.

We will now take our next question from Jamie Cook with Credit Suisse.

Hi. It's actually Peter Chang calling in for Jamie. I had a quick question. You guys made some comments about some opportunities in gas- or in the oil and gas business in Iraq, and I just wondered if you could provide a little bit more color and perhaps some thoughts on timing?

Yeah, you're aware that they've been out with- to- yeah, I think around 10 different companies with concessions to rebuild the Iraqi oil infrastructure?

Um-hmm.

We have been contacted by a lot of people and we have submitted bids to a few of the firms to support them in their infrastructure development that they believe is necessary to bring the volumes of Iraqi oil supply to the levels that they've committed to in their agreements with the Iraqi government.

Right now we're seeing the early phases are there. We're seeing the oil field service companies, Schlumberger, Halliburton, Baker Hughes, are there performing work, and as that cycle of work matures, then slightly downstream firms like KBR will see opportunities to build the infrastructure that once the oil is able to come out of the come out of the ground that it can be taken to market.

So we're optimistic that we've got a compelling value proposition given our seven years of experience in Iraq and also the hydrocarbons business that as the Shells and Exxons and BPs and some of the national oil companies move forward on their work, I think KBR is very well positioned to get that work.

And will this work be bid out lump sum turnkey, and do you expect sort of the competitive dynamic that we're seeing in- maybe like Saudi Arabia also take place in Iraq?

I think there will be a lesser tendency to bid lump sum turnkey in Iraq, and I'm making a relative judgment, because the environment is fairly uncertain there. You still have some activities that are considered hostile or quasi-hostile. I think it's prime- most of it's going to be- I think the work will tend to be less lump sum turnkey compared to what we see in Saudi Arabia, for example. But as the market matures I think the project execution across the region will converge, but initially I think we'll see more reimbursable work out of that market until things are fairly more routine in people's mind.

Great. Thanks, guys.

Our next question will come from Barry Bannister with Stifel Nicolaus.

Hello. Did you say, Bill, that there was a $10 million increase in legal fees associated with past LogCAP III legacy issues?

No, I did not. Of the $10 million, Barry, part of it is legal fees, part of it are provisions we've taken on some of these issues from 2003 and 2004, the aggregate of which is the $10 million. Ballpark, very rough order, it was about 50/50.

Okay. So are we talking about continuation of that on a quarterly basis, per the conversation earlier, so that we're totaling approximately $40 million for the year or would it be less?

We're hoping it will be less. We do believe that as we move forward on some of these legacy issues we'll start clearing our decks and there may be some charges there. But I really can't tell. It's real issue-dependent and the outcome of particularly the panels and how they've looked at things. It's certainly our hope we'll be able to manage it prospectively at a lower level than what we saw in the first quarter.

Okay. And then long lead-time, Pluto 2 procurement seems to be beyond the scope of a typical FEED, so are these client releases that are a quasi-award for portions of a pending project or is it all pretty normal for a FEED to do that sort of thing?

I can't recall this effort being part of a FEED on the prior FEEDs we've done in the LNG side. I would think that there would- there are, obviously, in any LNG project, some long lead-time efforts that- and procurement services that somebody needs to do, and our award is reflective of the strength we've had in performing the FEED work and we were very pleased to have received that work mandate from Woodside.

Okay, great. Thank you.

We will now hear from Andrew Kaplowitz with Barclays Capital.

Good morning, guys.

Good morning, Andy.

Bill, if you exclude- I think you said there was a $6 million charge on the Yemen project. If you exclude that, you're talking about almost 9% gross margin in gas monetization. My question is, is there anything to stop that margin from going double digit once we get Tangguh and Yemen behind us? I mean, do you expect that to happen?

Yes, I do. I think simply as we run down Skikda and Escravos that our margin should continue to increase. I think the one area that we're trying to get a better handle on here, and I would ask you and others to think about this is while our backlog went down, and it went down in the hydrocarbons from last quarter, we believe we're seeing a roll-off of a lot of third-party cost of subcontracts, materials and equipment coming out of our backlog as we work off Skikda, as we work off Escravos, and we're- we seem to be replacing that with more professional services work.

And that's how we're looking at the increase in head count, 10% in the hydrocarbons business, in light of a shrinking backlog, so we're seeing a change in complexion within our backlog to get more towards professional services. And I think as we see that, Andy, I think you're thesis that the margins should go up, should go to double digit, I think holds, and is one I ascribe to.

And they could do that this year? We're not talking about 2011 or '12, right? They could do that this year?

Well, I think the- obviously, we took some hits on Yemen this quarter. If we factor in the impact of those change orders that I talked about earlier, I think you could see some upside on the margins beyond what we saw this quarter.

Okay. And then if I focus on the- one thing that I was interested in is your infrastructure and minerals business now that you broke it out. It seems like, I mean, you talk about that business picking up over time, but it doesn't- like when you break it out, it looks like it's just kind of flattish, so are you seeing a pick-up there and do you expect to see better new awards as you go forward?

Yes. What we're seeing in the infrastructure business is it's really pretty flat here in the US. In fact, it's shrinking. We just haven't seen any impact on the stimulus at all and that's a smaller impact to us. We are seeing in the Australian market, where we've got our biggest concentration of infrastructure, some pick-up in activity and awards in the transport sector that we think will bode very well for us over the next two or three quarters through 2010.

On the minerals business, we are seeing an increase in activity lead largely by the increased consumption of iron ore and coal in China, where we believe that the, our backlog related to minerals projects in Australia will pick up in the second half of the year. We're seeing a lot of proposal activity right now as well.

Okay. Great, Bill. I mean, if I could just summarize these two questions, I mean, one thing that's just hard to understand a little, but I think I do, is seems like you're absorbing $0.04 a quarter of these extra sort of legacy LogCAP stuff in your guidance. Is there anything that you want to highlight that's actually better than our expectations that's helping you to do that as you go throughout the year?

Well, I think it- I think, one, there's our view that there's a little bit of an overhang on KBR. You call it a dark cloud regarding LogCAP. And we specifically wanted to talk about some of the good things that had happened this quarter that we think bodes well for us in getting towards a resolution of the numerous items that we've described in our 10-K. So we have, in my mind, some real positive momentum on getting some resolutions.

Secondly, as we look at the transition into LogCAP IV, we are hitting the margin expectations that we had- have been discussing since the IPO back in November of '06. We expect- the logistics work that we got the initial task order on and expect to transition this year. That's mid-single digits base fee and that's quite a- that's a big pick-up for us compared to the 1% base, 2% award fee we historically have had, and even a bigger pick-up compared to the 1% base that we recognized in Q1 with the absence of the award fees.

Great. Thank you, Bill. I'll get back in queue.

Okay.

Our next question will come from Vance Edelson with Morgan Stanley.

Hi and thanks for taking the questions. Bill, when you think about the troop drawdown in Iraq, which you mentioned will take place as scheduled, any changes in your mind to how long-tailed it might be in the coming years relative to your thinking six months ago or 12 months ago?

No change in thinking from six to 12 months ago regarding the tail, and we really don't have any inside information, other than you can look at where we are, we're still got people in Europe from World War II and while that's a very dramatic example of the US bases in Germany, I think there will be a force there for a while. But it's certainly in- for two or three years I feel that we're going to have a presence there and I'm not suggesting we'll be there for 50 years, but we do have a continuing interest strategically and militarily in that region to make sure it's settled, and so I think it will- that level should continue for a while, at least for what we look at as our foreseeable future.

Okay. Yeah, we'll hope we're not there for 50 years. And with the change orders not completed on the LNG projects, can you point to anything in particular that happened that caused the delay, or would you say the initial thinking was just a bit too optimistic in retrospect?

Well, things always seem to take longer on the LN- in the LNG world internationally than we'd like. And when we put together our budgets last October we looked out and thought that from October we saw a path to get this concluded in first quarter and we were incorrect. But we did- we do have new information that we've referenced in the specific comments of what the client has accepted and we're in the process of doing the documentation.

And, regrettably, for our quarterly reporting, we find that when you go through government agencies, IOCs and- as well as E&P companies things take a little longer to get buttoned up than perhaps dealing with a single customer in a US market environment setting.

Okay. And maybe on that exact topic about the delay, as you mentioned, the stimulus doesn't seem to be having any impact yet. Are there any signs of life there or are there any of the delays that you've seen that you think might be forces that are lifted in the coming months?

Well, my comments regarding the stimulus spending relate to our transportation-

Right.

-- and infrastructure business in Texas, and a little bit in Alabama. And we're watching, waiting and looking and- for the services that we provide, we haven't seen- we do a lot of construction management and we haven't seen projects in those areas come forward, and our businesses have declined in their size because of the apparent shrinkage of the construction work. And we're not seeing the volume of design services that we had hoped to. And, again, we're dealing with a small microcosm of the global infra- of the US infrastructure market, but certainly in the areas where we are present, we're not seeing positive impacts to our business from stimulus spending.

Okay, thanks for that. And just one more question, back on Iraq, and maybe this is more for Sue. With the increase in working capital there, should we expect that to kind of reverse in the second quarter, would that be a somewhat fair assumption?

Absolutely. We- it was a payment that was outstanding across the end of the quarter and we actually received the funds in the first week of the second quarter, so that is timing and it has righted itself.

Got it. Okay, thanks a lot.

We will now take our next question from Michael Dudas with Jeffries.

Good morning, everybody.

Good morning.

Good morning.

Bill, could you maybe give a little bit more color or characterize your comments in your prepared remarks regarding the competition in the energy space, is it- can you characterize it relative to front-end work, detail design, EPC lump sum, and are there certain regions or product mixes that are a little bit more or less competitive than others, and are you surprised at some of the new entrants you've been seeing going after your business? Thank you.

I would say that I was looking at some of the wire service reports today and I know [technique] was out and literally had the same comments that I had generally about the margins. The business ran up really well in terms of margins, and the pricing of our delivered products and capital projects became much higher in late '08, early '09, compared to where we were in- several years before, and we saw a lot of opportunity pricing as opposed to cost-based pricing take place. And that's led to an effort by our customer base to continue to challenge margins at all steps of the way. And we're seeing that on the engineering and services side. The margins have become more modest for us.

We have seen a very high degree of competition, particularly on downstream projects in the Middle East, where you're seeing a lot of initial awards won by Korean contractors at very, very competitive prices and the owners are- of the facilities at Jubail, Yanbu, even the owners of Gorgon, as we've gone out to do procurement globally, have seen their cost budgets very positively under-run because of what we believe are efforts on the part of fabricators and equipment manufacturers to build back their backlogs that we think had gotten down to very challenging levels.

In fact the- anecdotally, the award efforts and the very aggressive bidding by a number of contractors from Korea and the Middle East on these downstream projects could be likened, in some respects, to a Korean stimulus package to bring new work and new manufacturing into that country.

We believe that the competition will remain high. I think that as companies begin building their backlogs they'll turn their attention to how can they begin lifting margins throughout the chain and things will continue. I think there's been a general rush for people to buy some market share in the Saudi Arabian market, but how much of- how much that aggressive behavior continues, I can't tell, but I believe it will start backing off a little bit in the second half of the year as we return to a more normal bidding environment.

Thank you, Bill.

(Operator Instructions). We will now take our next question from Will Gabrielski with Broadpoint Group.

Thank you. Good morning, guys.

Morning.

Morning, Will.

If you could, you have a really good vantage point, obviously, in Australia with your involvement with Pluto, Browse and obviously Gorgon, Inpex. Can you talk about steel prices maybe? I know you've talked about some of the procurement costs and fabrication, but are bid validity periods shortening up? Is there any impact there? Then also what you're seeing on the labor front, because presumably there could be another wave or projects here and I'm wondering how that could impact contracting service?

I think steel, for our- in our world, is a globally sourced commodity, and we do keep an eye on that. I think we have seen a recovery, but I don't sense we're at a point where the market started getting really hot again. I think pricing is firm, but has not started the increase we saw between '06 and '08.

On the labor side, I think the market is adjusting the- as an example, in Gorgon, that's primarily going to be a fabrication yard construction with assembly at the site on modules. And we're- at Gorgon we're doing about 250,000 tons of modules on that project and the number of beds we have on Barrow Island is very relatively limited. I believe it's about 5,000 beds on Barrow Island. And you contrast that to the Segas project that was a single 5,000,000 ton-per-year train, compared to Gorgon, which is three, and on Segas we had 10,000 people on site. So you're seeing the market adjust to become more aware of some of the labor issues and the labor shortages that could arise in Australia, and are trying to minimize the construction labor impact on these projects by doing more of the construction in fab yards where you can better control the labor costs and productivity.

Okay. So is it- I mean, we all sit here and we're worried about fixed-price work and what some of the other contractors maybe have taken on projects, some of the coal-seam gas LNG projects. If you look out six to 12 months when some of these other LNG projects will move into the EPC phase, whether it's Pluto 2, 3, Browse, Inpex, et cetera, do you see a scenario where there will be enough projects moving forward at once that maybe the contractors have a little bit more negotiating leverage at the table and you're not too worried about that developing?

Well, I could never admit we'd have more negotiating leverage with any of our clients. But the- we do see projects moving forward. I think as we talk to our customers around the world, they are similar in their belief that the volatilities, the very aggressive volatilities that we saw in the last five years, are largely muted compared to what we've seen. And we would expect that the customers will be pushing back for increased degrees of lump sum work.

Now, when I say lump sum, it- moving from an all reimbursable construction project to where you do lump sum home office services and maybe do the construction management on a reimbursable basis. That's a movement towards more lump sum and we are expecting that with our clients because those are certainly costs and resources that we better control, than certainly the field work in Australia, for example.

As you see the national oil companies move forward, I think their bias has always been to do more on a lump-sum basis. And I think you'll see some movement in that respect. And it wouldn't surprise me to see the breakdown between lump sum and reimbursable work move upward a little bit at KBR as we address this reality. I think we're very comfortable bidding lump sum but we're also very cognizant of what the risks are and how we price the risks, and commercially what risks we're willing to take as a company. And that's had an effect in the recent environment of driving us more on a reimbursable basis. But with the present environment and the lower volatility, I think you could see that 19% fixed price work move up some in the coming years.

Okay. Just one quick question. The refinery in Angola, which you talked about EPCM opportunity in the first half of 2010, is that expected to be competitively bid or not?

Right now, we're working with the customer to take the FEED activities and move them into the next step, so I don't believe so.

Okay. Thank you guys.

Hey, Brandon. I think we've got time for one more question.

We will now take our final question from Barry Bannister with Stifel Nicolaus.

Hi. When I look at the new that came out regarding the Ras Tanura petrochemical facility moving itself to Jubail and doing away with the integrated refinery, also in so doing they go from naphtha to an ethane feedstock which reduces the slate of petrochemicals produced. So can you give us some color on just how large a decrease this would be in the size of the award, and since you're sharing it with Foster Wheeler what is your role in the potential [FID] here and what would it change, given this change in the size of the job?

Well, Barry, I think we've seen the numbers that have been bandied about and I'm only referring to what's in the press now, that the projects have shrunk from maybe a $25 billion project to $17 billion, which is a very big savings in today's market. I think the owners are kind of rethinking how they want to move forward on undertaking the FEED, and at this stage I think there is a question in the owner's mind of do you want to have that work across three companies on two different continents, and what are the costs to undertake such an effort?

And as they've descoped the project, clearly it becomes more bite-size for any number of players, including KBR and we're- we still believe that we're providing great value to them as the PMC contractor, some of the license work we're doing, and we continue to have an active dialogue of how we can best serve the owner group going forward under the new configuration with the location at Jubail.

And then on LogCAP III being the current life-support role in Iraq, I'm not sure why the Army would transition to LogCAP IV if they have an open call option on you for a 1% base rate and a 2% award fee to continue in your current capacity. So is there some foot dragging? Is that an option that they could pursue or are they going to award a LogCAP IV for the life-support function?

Well, we do know that the bid is due tomorrow, which is the end of April, and that they have asked for a bid validity period of, I believe, about double what we had on the logistic, I think maybe as much as six months, 120 days to six months.

I agree with you, I think there is the call option aspect which you have to weigh against the political benefits of just saying LogCAP III is gone, now we're on LogCAP IV. But I think the bigger issue is as the Army is moving troops out of Iraq, and they're shutting down bases and moving people to other bases and consolidating efforts and taking equipment and materials and putting them over to Afghanistan, and taking some of it back to staging areas all over the world, I'm sure the guys in theater, with all of the issues that they're facing in this massive troop movement, probably do question, why do we want to make a change right now possibly to somebody we don't know or haven't dealt with? And I guess, in our minds, it is it is conceivable that the Department of Defense could come to the conclusion is why not just keep this on LogCAP III, or let's give it to KBR on LogCAP IV, simply because they coordination issues between the Army and the contractor are very different as- because of the degree of troop movements and equipment movements and that's going to be going on in the next six months there.

Okay. And then, lastly, any progress on the Pemex arbitration payment? I know it's not as small as EPC-22 and -28, but those took three to six months.

Yeah, certainly as we quoted in the queue, there have been some rejection of PMX's efforts in Mexico on procedural matters. We filed to validate the award in New York right- as quickly as we could. We think we're very well positioned in New York to affirm the award. I think, honestly, for an award this size and the duty PMX has to its shareholders, i.e. the government and the constitution of Mexico, they need to exhaust all possible avenues to seek to overturn this before they would be able to make the payment to KBR.

But we feel we're in a very strong position and we also have an interest clock ticking on the award that I think PMX, and certainly we're aware of. We've not included any of the interest on that award in our financials but we're waiting. We think we're in good shape, and we think eventually that amount will get paid.

Okay. Thank you.

I would now like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you for joining us today. As always, if you have any follow-up questions, don't hesitate to give me a call today. I'll be in the office all day. Thank you.

This does conclude the KBR first-quarter 2010 earnings call hosted by KBR. They thank you for your participation and ask that you have a wonderful day.