KBR Inc (KBR) 2011 Q1 法說會逐字稿

Good day, and welcome to the KBR first quarter 2011 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, and you will receive instructions on how to queue up at that time.

For opening remarks and introductions, I'd like to o turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead.

Thanks, Jason. Good morning and welcome to KBR's first quarter 2011 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 also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer and Sue Carter, Executive Vice President and Chief Financial Officer.

In today's call Bill will provide opening remarks and business outlook. Sue 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 10K for the year ended December 31st, 2010, KBR's quarterly reports on forms 10-Q and KBR's current reports on form 8K.

Now I'll turn the call over to Mr. Bill Utt. Bill?

Thanks, Rob, and good morning, everyone. Overall, I continue to be pleased with KBR's financial performance this quarter.

KBR's first quarter net revenue was in line with our expectations and is up 7% year-over-year when excluding log cap revenue. Operating income for the quarter is up 45% on a year-over-year basis. KBR's earnings per diluted share were $0.69, which when one excludes the benefit of discrete tax items was up 86% year-over-year and 4% from the prior quarter.

KBR's job income backlog increased 4% compared to the prior quarter, while revenue backlog was flat. Compared to the prior year first quarter, job income backlog is up 8% despite a revenue backlog decline of 8%. As KBR continues to work off the lower margin projects in our backlog, we continue to be successful in replacing this backlog with higher margin projects.

Now let me move on to a discussion on KBR's discrete markets and business units. KBR continues to execute on its market-leading position in LNG with five major LNG projects at various stages of activity. The total expected capital spend on these five projects is approximately $46 billion.

The impacts thickness in Pluto 2 FEEDs are now complete and we expect FIDs for both projects during the fourth quarter of 2011. We remain actively engaged in free FEED activities pre-FID activities on both projects and are currently in open-book-tender discussions on the impact projects, as well as providing pre-FID services on the Pluto development.

FEED activities for the Kitimat LNG facility are underway and KBR is also providing pre-FID site construction management services. The FEED should be complete by year-end and the owner expects to take a final investment decision in the first quarter of 2012.

Earlier this year, KBR announced the FEED award for the browse LNG project. The fee work remains on target for completion in mid-2012, in line with Woodside's original timeframe to correspond with the mid-2012 FID.

Finally, KBR is exclusively engaged on some early work on a potential fourth train at the Gorgon project. We anticipate formalizing pre-FEED work to commence in the very near term.

For KBR's refining and downstream markets, we continue to execute a best-in-class project portfolio. KBR's detailed engineering work on the Yanbu project for utilities, interconnecting systems and terminal packages is nearing completion, and the nucleus of KBR's PMC team will shortly move to the site while other KBR personnel are presently deployed in the EPC contractors' offices. KBR is also providing EPCM services on the BP Huskey Toledo refining project. This project is scheduled for completion in late summer 2012.

On the Ras Tanura integrated refinery and petrochemical project, key work on three of the five multi-package process envelopes are now complete, with the remaining envelopes on schedule for completion later this year. In anticipation of FID, KBR is continuing our coordinating PMC activity, starting (technical difficulty) -- support activity on the completed FEED envelopes. Planning for the KBR personnel ramp up in kingdom and reviewing the projects' utilities and off-site requirements.

For the Lobito refinery project in Angola, KBR continues to perform early stage EPCM work in preparation for the project's expected FID in the second half of 2011. KBR is also working on the design for the physical site as well as for the consolidation of multiple live-in camps.

For the Jizan refinery project, KBR's ongoing FEED and PMC activities for the 400,000 barrel-per-day project include the development of the process design, layout, integration, and optimization of the facility; development of equipment and material specifications; preparation of EPC bid packages; and development of a cost estimate for the construction of the facility.

Finally, last week KBR announced the award of an EPC contract to build a first of a kind biomass to renewable crude facility in Columbus, Mississippi. The facility is designed to process 500 tons per day of wood biomass and produce over 11 million gallons of fuel per year. KBR will provide engineering and procurement services as well as direct hire construction for the commercialization of Keyer's proprietary technology to convert biomass into drop-in biofuels such as gasoline and diesel blend stocks.

KBR also recently announced the award of an engineering and project management services contract under Saudi Aramco's GES Plus Initiative. The first allocation of work under the GES Plus Initiative is expected in the third quarter of this year.

KBR's technology business unit continues to grow and had another outstanding quarter, with a 47% revenue increase and a 50% job income increase compared to the prior year first quarter. Technology also generated approximately $30 million in new license and basic engineering design awards in the quarter.

In our North American markets, we continue to see more signs of recovery as evidenced by several project awards since the beginning of the year, including the Keyer project and new awards for work for the topsides detailed engineering and design for the Big Foot project, and the semi- submersible hull design for the Jack/St. Malo project. Additionally, KBR announced last week that a consortium of KBR and BMW was awarded a $668 million contract by the Palm Beach County Solid Waste Authority to provide EPC services for the county's new state-of-the-art waste to energy facility. KBR's scope of work in this project is approximately $450 million.

Finally, yesterday, KBR announced the award of a $65 million contract by Chevron Products Company, to execute a base oil expansion program (technical difficulty) refinery in Pascagoula, Mississippi, which upon completion is expected to be the largest premier base oil plant in the world. The construction project includes building a new product lubes hydrocracker and a lube dewaxing hydro-finishing unit. We also continue to see a ramp-up in planned North American capital investment, particularly for a wide range of projects in the forest products industry, for utility emissions control projects, and for new combined cycle generation projects in response to recently announced coal plant retirements and delays in nuclear plant developments. Overall, we are seeing a 10% to 15% year-over-year increase in the capital budgets of our core clients.

At our North American Government and Defense business unit, we continue to believe that troop levels in Iraq will remain relatively flat into the back half of the year with a ramp down during the second half of 2011. KBR also executed several modifications to the base life-support pass quarter under the LOGCAP III contract.

Starting March 1, KBR's LOGCAP III activities will be cost plus fixed fee, similar to LOGCAP IV contract. While the LOGCAP III base life-support task order will no longer contain award fees, the fixed fee is at a level typical for traditional US government contracts. We expect to receive our final award fee under the LOGCAP contract for the period from September 2010, to February 2011 during the third quarter of 2011.

Going forward, prospects at our North American Government Defense business unit also remain strong and include $3 billion of projects announced by the Army Corps of Engineers in Afghanistan; extension of our existing base life-support activities in Iraq for either the Department of State or US Army; base operations support contracts for the US Navy in Bahrain and in Africa; equipment (technical difficulty) maintenance support and construction activities at many US military installations; and work with government agencies such as the National Science Foundation and the Department of Homeland Security.

At our International Government and Defense business unit, I am extremely proud that KBR has retaken the hill and has again been named the UK Ministry of Defense's top supplier for 2010. This is the third time in four years the MOD has awarded the top score to KBR's International Government and Defense business unit. The IGD business unit was also recently awarded an enhanced Foreign and Commonwealth Office contract to support the British embassies in both Iraq and Afghanistan for the next three years.

For our minerals business, Robertson Schaefer continues to win its traditional work in the $15 million to $70 million project range, and has over $400 million of proposals outstanding in Indonesia and approximately $160 million in proposals outstanding in India. Further, with the new financial backing from KBR, Robertson Schaefer is now able to qualify for larger projects with a wider customer base than they were able to pursue prior to the acquisition.

On the infrastructure front, KBR was awarded a five-year contract by the Public's Work Authority of Qatar to provide project management services and engineering support to deliver a package of 30 major roads that comprise the Doha Expressway program.

KBR has also been awarded numerous other Australian infrastructure projects recently including contracts for planning and management services for a motorsports race; new road projects; the largest wind farm in the southern hemisphere; and a rail extension project.

For the services business unit, we are also seeing a return of larger and more meaningful opportunities in these markets.

The building group has seven major hospital products with nearly 2 million square feet of hospital space under construction. And KBR's work for DuPont continues to grow with 21 construction and maintenance projects across three separate services product lines.

Our Ventures business unit continues to benefit from high capacity factors, strong ammonia pricing, and uninterrupted service at the EBIC ammonia project.

Now I'll turn the call over to Sue. 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.

Consolidated KBR revenue totaled $2.3 billion which was in line with our first quarter expectations. Revenue declined $310 million or 12% from the prior year first quarter, which includes the expected decrease of $422 million related to the LOGCAP project compared to prior year first quarter. Offsetting the decline in LOGCAP revenue was a 14% revenue increase for the hydrocarbons group, with all business units within hydrocarbons reporting increased revenue.

Infrastructure and minerals revenue was up 64% compared to the prior year first quarter, primarily related to the addition of project revenue related to the R&S acquisition and recently awarded projects.

Consolidated operating income was $144 million in the first quarter of 2011, up 45% compared to the first quarter of 2010. Net income attributable to KBR for the first quarter of 2011 was $0.69 per diluted share compared to $0.29 per diluted share for the prior year first quarter.

The first quarter of 2011 earnings per diluted share included an approximate $0.15 per diluted share benefit from a lower tax rate, which I'll discuss in more detail later. You can find further details of the year-over-year business unit operational comparisons in the earnings press release issued yesterday evening, but let me briefly mention a few operational items.

As mentioned in last quarter's call, in early January, KBR successfully negotiated the closeout of its participation in the LNG project and signed agreements with our partner JGC to transfer our interest in the project joint venture. As a result of this settlement, KBR recorded an approximate $8 million pretax gain in the first quarter.

In the first quarter, our Australian business was impacted by flooding in Queensland. The impacts reflect approximately four days of office closures, deferred work on existing projects that were closed during the flooding, and these same projects had slow ramp-ups due to wet conditions. We believe the negative impact during the first quarter was approximately $3 million.

In March, KBR received a $16 million award fee related to our LOGCAP III work for the six-month period of performance beginning March 2010 through August 2010 in Iraq. For this period, KBR's performance was recognized as very good and the program received high customer satisfaction ratings.

I will now review other financial items. General and administrative expenses for the first quarter of 2011 were $44 million, down $5 million from the first quarter of 2010. The G&A expense decline was primarily related to timing issues which lowered facilities, IT systems support, and incentive compensation costs. For the full year 2011, our current estimates for corporate G&A expenses are in the $220 million range.

Our first quarter 2011 effective tax rate excluding discrete items was 32%. In the first quarter 2011, our effective tax rate was 16%, due to discrete tax items related to tax planning strategies, and the release of a deferred tax reserve for an Australian rail project. KBR participated in the joint venture in financing for the rail project which has been in receivership with assets recently sold to a third party. As the final liquidation of all items related to the project progresses in 2011, we will continue to evaluate existing tax reserves and will update as appropriate.

Labor cost absorption income was $3 million in the first quarter, compared to labor cost absorption expense of $4 million in the first quarter of 2010. Labor cost absorption income improved primarily related to higher headcount in the labor resource pool as well as higher chargeability and utilization in several of our engineering offices. The headcount in the labor resource pools at the end of the first quarter 2011 was up 12% compared to the prior year first quarter and up 2% from the December 2010 quarter.

I would like to discuss KBR's backlog in a bit more detail building on Bill's earlier comments. The revenue backlog as of March 31, 2011, was $12 billion, down 10% from a year ago and flat compared to this sequential quarter. Essentially, $2.3 billion of new work added this quarter was offset by general project work-off. The corresponding job income backlog was up 8% year-over-year and 4% from the sequential quarter.

With respect to how KBR actually books projects in a backlog, KBR books backlog when actual awards are received and/or scope is definitized.

For example, when KBR is awarded an IDIQ and MATOC contract, we do not make an addition to our backlog based on what we expect to book over the life of the IDIQ or MATOC project. Rather we only book to backlog actual awards or definitized awards under these programs. This is a conservative approach to our backlog, but allows us to accurately monitor our revenue backlog and progress on job income dollar and margin percent growth.

Compared to the sequential quarter, the hydrocarbons backlog was down approximately $220 million, primarily related to general project work-off in the gas monetization downstream and technology business units. Partially offsetting this decrease was improvement in oil and gas, with the addition of an onshore and offshore project and additional work releases on several ongoing projects. IGP's backlog was up $230 million, led by the Doha Expressway project and several new Robertson Schaefer projects in the infrastructure and minerals business unit, as well as scope additions on the Conolog project in the IGD business unit.

Services backlog was down $46 million, primarily related to general project work-off, which was partially offset by approximately $227 million in new awards in the building group and industrial services business. Overall the backlog portfolio mix at the end of the first quarter was 80% cost reimbursable and 20% fixed price. Essentially the same mix of 79%, 21% in the fourth quarter of 2010.

Next, I will discuss our liquidity and balance sheet. Total cash provided by operating activities for the first three months of 2011 was $225 million, compared to $5 million used by operations for the first three months of 2010. Driven by overall strong quarterly earnings, and active management of working capital to support project execution activities. Cash provided by operations was also positively impacted by collections of accounts receivable, advanced projects billings to customers, and repayment of advances and distributions of earnings from unconsolidated affiliates. Also during the first quarter 2011, we contributed approximately $45 million to our pension plans.

At the end of March 2011, our balance sheet remains strong with cash of approximately $788 million, which included $207 million associated with our consolidated joint ventures. The $788 million in cash, essentially flat compared to the sequential quarter, reflect uses of $164 million for the MWKL acquisition; the pension contribution of $45 million I mentioned earlier; and $26 million in capital expenditures.

KBR's full-year 2011 earnings per diluted share guidance is $2.05 to $2.30. The LOGCAP III award fee received in the first quarter does not have an impact on our guidance range. However, due to the lower first quarter 2011 effective tax rate and the potential for further discrete items in the next several quarters I mentioned earlier, we will continue to monitor these items and will discuss guidance during the second quarter 2011 call.

And now I'll turn it back over to Bill for his final remarks. Bill?

Thank you, Sue. I'd like to provide KBR's outlook for our businesses.

Over the past several quarters, I have spoken about the robust project environment in Australia, and in the Middle East where KBR continues to see ample opportunities to grow our business in gas monetization, downstream, and in the infrastructure markets. We're also excited about the growing number of opportunities in the global offshore oil and gas market as well. We are now becoming bullish about the opportunities before us in KBR's North American market sectors and expect to see our sales continue to grow at our business units, which are focused on these North American markets.

Overall, we feel we have a great portfolio of project opportunities on the horizon, and look forward to their award over the next several months. Now we'll take your questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

Thank you. Today' s question-and-answer session will be the conducted electronically. (Operator Instructions) And we'll go first to Tahira Afzal with KeyBanc.

Hi. Good morning, gentlemen, and Sue. And many congratulations on the quarter periods

Thank you.

I guess first question is, in regards to guidance, why wait a quarter, (technical difficulty) given the extent of the tax benefit?

And I guess the follow-up question from me is, then I would love to learn a little more about the North American markets that you're incrementally more bullish on.

And we listened to the Technique call earlier on this morning and they were indicating that in the Middle East, the competition on refined petrochemical projects remains fairly strong still. And, they do expect a number of prospects to go ahead over the next several months, but the pricing is still competitive. So I'd love any commentary you have on that as well.

Let me start out and talk about the guidance piece of your question here.

As we look at the first quarter, we believe we had a strong quarter from operations and, of course, we did have the tax item that occurred, but it's still early days as we look at 2011.

And we would like to take another quarter or two to launch the businesses (techniculty difficulty) the other tax items unfold and make sure that, as we do update that guidance, that we're sending a signal once instead of perhaps multiple times because there are many moving pieces.

So we're just being cautious, and saying, wait a quarter. Let the year develop, and we'll update you at that point.

On the questions regarding which markets are we bullish, we're clearly becoming more bullish on the power side, certainly the solid waste authority award is a big one for us. We also see other generation projects out there, due to the retirement of the coal plants and what we expect to be continuing delays or cancellations of nuclear developments.

We've also seen some movement now on the pollution control projects for the utilities, now that they have some idea of where the EPA MACT rules are going. So that's an area we're much more optimistic on.

We're seeing a great increase in the volume of front-end engineering design projects. In our industrial markets, we talked about forest products, for example, and so several years of relatively below-trend capital investment. They appear to have some appetite to catch up over this year and next year on projects.

We're also seeing the US -- construction markets start to come back. We're very pleased with the award from Chevron, and we're seeing a lot more projects at a lot larger size that really play to KBR's competitive strengths.

We do big project execution very well. We have great safety systems, material management systems, and it's a little tougher for KBR to demonstrate that competitive advantage on a smaller project and as projects get larger, these become increasingly more leverageable advantages for us.

The Canadian markets do appear to be picking up. We're seeing some more activity and projects being discussed in Canada. And also the minerals markets continue to give us some great optimism for Robertson Schaefer. We're seeing a lot of -- for example, we're seeing a lot of discussion about reopening some gold mines in Ontario, with the price of gold at $1600 an ounce, anecdotally, they say anything above $700 should give a positive return on investment. So we've got a number of positions that we've become more bullish on in the North American markets over the last couple months.

Regarding the Middle East, it does remain a very competitive market, particularly in those projects where they're not technically differentiable. And we've seen some of the awards go to Korean contractors that were at levels far below where the Western contractors were bidding.

We still see opportunities certainly on the PMC work that we're doing on Yanbu, on Ras Tanura, that we're doing on Jizan, where differentiated contractors can come in and win some good work at some reasonably good volumes of hours. And also we think the recent award of the GES Plus Initiative will also have us in a certainly a less competitive environment than we've seen certainly on the non-technically differentiated projects that we've seen earlier on [Shatba] and [Lawson].

That was very helpful. Thank you both very much.

And we'll go next to Will Gabrielski with Gleacher.

Thank you. Good morning. So one of the things I think that people are a little bit interested in knowing would be your execution capability and capacity should a number of these LNG projects ultimately be awarded to you? So maybe if you could just walk through the capacity, where it would be coming from and how you think you could handle the schedule that you might be looking at?

Yes. I think, Will, with respect to some of these products, we've got (technical difficulty) impacts we're doing with JGC and [Shiotta], and our scope of work is going to be more on the fabrication oversight and construction management. So they're really not drawing on the critical engineering skills that we have that we need on an LNG facility, but it's a big scope of work and it uses different talents within the Company.

Pluto is scheduled for our London operations, and you may recall a couple years ago that we had three big projects in our Greenford office. It was Tangguh, it was Yemen and it was the Pearl GTL project. We think we've got leadership teams identified already working on the FEEDs that can, you know, do really up to three projects in London. And certainly with our integration of MWKL at its Greenford office with our Leatherhead office and the experience that Leatherhead has gained working on the Gorgon projects, we think we've got good capacity in London to do the Pluto project, the Browse project, as Gorgon 1, 2 and 3 is winding down in London, the work on Gorgon 4 can easily be absorbed for us in London.

The Kitimat project we're looking at executing in Houston. I mean, we're probably one of the few if not the only company that can do LNG projects out of multiple offices.

And we've recently completed the engineering of the Skikda project that was done in the Houston office and are looking to roll over that project team for the Kitimat project. So I don't see with these five projects in front of us, a constraint that we're worried about from a resource standpoint.

Okay. Great. And then to follow up on MWKL and R&S, I guess the explicit accretion estimates you gave, any changes to those based on what you've seen or any opportunities emerge since you've folded those companies in and done a more thorough review?

We're tracking along plan.

I think we're seeing a little more activity in Greenford than we had envisioned at the time of the acquisition because we've got Jizan there. But I think we're still on track with the level of accretion from those two acquisitions and its impact on our P&L.

That's great. I'll hop back in queue. Thank you.

And we'll go next to Andy Kaplowitz with Barclays Capital.

Good morning, everyone.

Hi, Andy.

Bill, so if you step back and think about the markets again. You've given us a good summation of where you see each of the markets.

My question is, you see oil as high as it is, refining margins are better, natural gas feedstocks are cheaper. What are the chances that we see, all of a sudden, a bigger ramp up in the hydrocarbons market?

We know about your FEEDs and all that kind of stuff, utilization is still kind of low across the space, as you've alluded to and pricing is still competitive. But is there a chance that we're still very close to a pretty big pickup that we don't see?

Andy, I would think so. Actually, if you'd asked me that three months ago, I'd give you the same answer. And I was actually surprised by some of the pricing that was bid on the [Shaybun] and Lawson projects, which tends to work against that belief.

I do believe that we are seeing an acceleration of awards. We are seeing a building of work. And when we look at our portfolio, the Jizan project we think will be a very large consumer of services at KBR yet today because of the work order release programs that Aramco uses. We're just not showing much in backlog right now, but as we look at it, our staffing, I do think we're going to see an improving market environment. It is pretty competitive right now, but as we look at things particularly on those projects where we are technically differentiated, I think we're starting to see a turn.

I'm not necessarily wanting to go out and tell you on what day, but I just feel things are getting better and more sustainable in the space. And we've seen some of that come across in the awards we saw in Eastern Australia on LNG last year. The one thing we do look out for is what is that going to do when this thing turns up to the materials and equipment and the ability of the market to start looking like it did in 2007?

So we're looking really hard as we look at these projects on what risks can we underwrite and what risks can we pass of to suppliers? And as you'll note, our backlog still is 80% reimbursable, and while the -- as we look at these five LNG projects with about $46 billion of value, I'm just -- I don't believe we're going to book $46 million of backlog at the end of the day.

I think some of these projects will have risk sharing with the owners in certain areas and there'll be other parts that'll be lump sum by KBR. But we're going to be very systematic and very diligent in how we identify and review the risks that are attendant to doing these LNG projects for example.

So it's getting better and we're mindful of some of the lessons that the space learned back in '07, and make sure that we avoid repeating some of the downsides that came out of a rapidly recovering capital spending market.

That's great. And unrelated question on SG&A. Obviously it was low in the quarter, you talked about timing. But why don't you give yourself more credit, you know, for keeping costs down?

I mean, you did lower your guidance for the year in SG&A costs, so it kind of seems to me like it's just generic cost savings, yet you're really talking about timing.

We worked very hard on it.

You know, honestly there always is a tension between those that have to deliver the general administrative services and what they think they need to get through the rest of the year, compared to the pressure that Sue and I put on them to not spend the money.

And that's always going to exist in any company, and all I can say is we're going to continue to watch not only our dollars but small change to make sure we spend what we need and no more.

I wish we could be more bullish, but I think we've kind of moderated it down a little bit from the initial guidance. And with Sue's comment, at 220 for the year, hopefully, we'll continue to be successful in managing the G&A.

Thank you.

> And we'll take our next questions from John Rogers with DA Davidson.

Can you hear me?

Yes.

Sorry. First thing, Sue, how much is left in potential tax benefits from the liquidation of the project in Australia?

Well, that's part of the question.

So as you're going through a project like this that has a complex structure, first of all, that has partners and that has a liquidator that is starting to go through the process of doing the final liquidation, there's a lot of gates to go through and there's a lot of moving parts.

And so at this point, we just really have an item that we don't want to quantify for people, because it is still moving and it is still developing and it's an unknown.

But is it a lot larger or smaller than what we've seen so far?

Well, I think if you look at our first quarter, first of all, there were two different items associated with the tax rate being at 16%.

There were the strategic planning items, which were essentially taking advantage of some tax losses in dormant entities.

Those were a larger percentage of the first quarter piece than what the actual amount related to freight link was or to the Australian rail project.

So like I say, there is some opportunity for discrete items in the back half of the year, but it's just not something that we want to call out at this point.

Okay. And then secondly for, Bill, in terms of the margin or higher operating income embedded in backlog -- and it's always difficult with a business like yours, but is a mix issue that is getting better, or can you -- is there a change in pricing on the projects that you've included?

Well, John, to quote Deion Sanders, it's both areas. With respect to a mix issue, I think we're seeing a more -- a bigger impact on the mix issue today with some of the awards that we're getting in the construction side, as well as the power and industrial side. And so that mix is helping to bring that up.

But we're also, we've talked about replacing some of the Escravos backlog and the Skikda backlog. And we are getting new hydrocarbons projects in at margins that are much higher than what those margins are.

And if you recall, we're just booking a G&A component on Escravos and the Skikda margins are very low.

So we are getting some replacement benefits on like-kind hydrocarbon projects. So it's happening in a broader array. And we've talked about the replacement of low-margin backlog for a while. Certainly the new backlog that comes in on LOGCAP should be higher than what we've seen.

But I'm now more optimistic about our ability to grow the job income in the Company on non-carbon's projects, just based on the turning North American market that we're seeing.

Okay. And of what's left in backlog -- of your total backlog, can you tell us what portion is at that breakeven type level or -- ?

I don't have that, John, to be honest with you. I think if we look -- if we look at Escravos, we're targeting a completion at the end of next year on Escravos. Skikda's probably on the same time frame. I'd really hate to get on a limb.

It could be 20%, 30% of the backlog, just based on what we've got, so I still think, even at the low end of that range, it could be something that you could see some good appreciation of a job income backlog, just as we replace it.

And if we're fortunate to get in some of these very large awards that I talked about over the next nine months, then we could see some fairly significant changes to the number -- amount of dollars of job income that we have in our backlog.

All right. I'll jump back in queue. Thank you.

Okay.

And we'll go next to Joe Ritchie with Goldman Sachs.

Good morning, everyone.

Hey, Joe.

So it seems like the opportunity, particularly for the back half of the year and then into early next year from a booking standpoint is really good, given what's happening on the LNG side.

Guess I'm trying to understand, you know, you were near-term for the second quarter and I guess specifically, the waste to energy product that you booked, are you going to be booking the entire project, the $450 million into your backlog into Q2?

And then also can you tell me a little bit about some of the contracts like the (technical difficulty), and then Jizan, how that's going to be evolving into PMC over the next few quarters?

I think on the Waste Energy project, we haven't had the booking committee meeting on that.

Certainly, it's announced as a big award, and I would expect it to go in at what we disclosed in the release.

Regarding Yanbu, Ras Tanura and Jizan, I think we're going to continue to get work releases out of Aramco on that, so you're going to see steady work, a lot of people tied up on the projects.

But because it's essentially just in time backlog, like LOGCAP, you're not going to see a lot of backlog impact from those projects.

But we've seen a good level -- we just looked at the history on Yanbu or Ras Tanura, we've had a great level of volume coming out of those two projects to date, yet we've never really had a big impact on backlog.

And we'd love to be able to estimate what we think the overall component is, but that just doesn't fit with our views on booking backlog.

Okay. Fair enough.

And I guess just switching gears a little bit to the quarter itself. The one area that I wasn't sure what kind of happened to, I guess, from a margin standpoint on the services side of your business, I thought that the margins in that business were set for this quarter.

Can you talk a little bit about what happened this quarter and how that was, potentially different than the margins that you've been booking in that business previously?

Joe, I think it's generally a falloff in volume. And when you've got a fixed SG&A that we're carrying, it has leveraging impact on the margins.

Right now, we're expecting the business and have expected the business to improve. And so we didn't take the services' overhead down to a level that was consistent with the amount of work we were doing this year.

Instead, we elected to turn some operations guys into sales guys, and maintain our bench strength, if you will, to address the work and be able to execute the work that we're expecting to sign up this year.

Okay. So is it possible, then, that that margin kind of stays consistent with this past quarter's margin for a couple quarters until that business starts to ramp up again?

Yes. I think you're going to see the overhead spending and services stay about the same, and then we'll see a gradual increase over the year of -- I expect to see over the year of job income coming out of the services business as these bookings are achieved.

Okay. Great . Thanks for answering my

Okay.

And we'll go next to Jamie Cook with Credit Suisse.

Hi. Good morning. Two questions. One, Sue, just back to the guidance again. It sounds like if we get a raise in the second quarter, it's primarily due to tax.

Is there any areas just within your core business or on an operating business where you think there's an opportunity for you to -- or other areas you're doing better than you thought in your core business?

And then second question, Bill, the -- while it sounds like you don't have concerns about capacity if you win a lot of these big awards in the second half.

And it sounds like competitively some of your peers are still acting somewhat irrational, on the customer side, are you hearing any concerns from them as these large projects go in the back half of the year that there's a potential for them not to get their A team?

Are there any concerns there, whether the A players are going to get -- will be used up quickly? Or the second question is that they need to ramp up early on these products just as material costs continue to accelerate so they want to lock in at lower prices now?

Okay. Let me start out, Jamie, on the guidance side.

And I think that as we look at talking about the guidance, after we complete the second quarter, I think we do have opportunities within the businesses.

Our businesses did have a good quarter. Our G&A, while there is some timing, as Bill noted earlier, we're going to continue to push on that.

We're going to continue to push on the business unit overhead.

And so there's all kinds of different areas outside of the tax arena that, as we look at our operating performance and how we're executing, that we're going to continue to push on.

And that was why it's important to get a full look at the year as it goes along a little bit further before we update the guidance.

So opportunities, in all different areas of the business, from execution and from continued look at cost.

On the customer base, Jamie, we've been selling the need for them to get moving fast in anticipation of beating an upturn in materials and equipment for a year, so that sales tactic continues.

From a concern about A teams, I think a lot of that is fleshed out in the FEED stage of these projects.

When we present the team that's going to do the FEED and it has various discipline leaders for all the major areas, engineering areas or project delivery areas on the project.

And these are the leaders that if you don't have an A team at the FEED stage, we don't think you get the FEED.

And so we think with the FEEDs that we've got and the work that we're doing that our customers are comfortable about our ability to provide these A-team players at KBR.

And we've got 35,000 people and very strong concentration in the hydrocarbon business.

I think with our acquisition of MWKL and the work we're doing to combine that into a single London operating center across two different offices allows us -- positions us to be the biggest E&C player in the London market.

We've got a large capability here in Houston and also have been able to expand a lot of the project execution in some of the BE&K offices we acquired in Birmingham as well as Wilmington, Delaware.

Our high-value offices in Jakarta and Monterey are growing. So we haven't seen any customers concerns for us regarding our capabilities, and a lot of it's timing.

We had a very big ramp-up of our teams with the Gorgon project that was awarded in September of 2009.

And Gorgon is winding its way out of our front end offices in London, out to the Singapore and Jakarta offices.

So we've got -- we're actually looking to get worked into our London operations center to keep that core group of folks productively employed.

And we've been successful in some of these FEEDs, but as more people roll off of the Gorgon project, for example, and as Pearl winds its way through its commissioning, we have more resources coming available to do these products.

All righty. Thanks . I'll get back in

And we'll take our next question from Steven Fisher with UBS.

Good morning.

> Good morning, Steve.

In terms of what's embedded in guidance, do you expect or even need to grow income dollars in gas monetization and downstream sequentially over the balance of the year to hit the midpoint of your guidance?

And if so, what has to happen to achieve that growth in income? Because we're not quite seeing it yet in the backlog trends.

Well, I think as we look at it where the businesses are operating, Steve, I don't think we need to have a big uptick in those margins to hit the midpoint of our guidance.

As we looked at the full year of 2011, when we were going through the budgeting process, we evaluated all of those different areas and we believe that we're on track to do just that with where we're operating now.

Okay. And then on cash flow, is there anything you see coming down the pipeline in the next couple of quarters that would be big uses of cash? Because your cash load has obviously been very good. Just want to see if that is likely to continue.

And then what are your thoughts on further buybacks here? Looks like you creeped up a little bit above your 150 million share count kind of target.

Right. Right. As we look at the cash, we'll continue to have sort of small to average expenditures on the capital expenditures side.

But again, we target that sort of at the depreciation level, so nothing big there.

On the share repurchase side, we do have the opportunity to sweep shares down to the 150 million share level.

We did not sweep shares in the first quarter, but continue to look at that and look at what the opportunity is for that.

But as we go through, we believe that our execution on cash is going to continue to be strong.

We are very focused on all of the different elements of it. And I think the one big item that we didn't talk about today but that's still out there is the collection of EPC 1.

So not a use of cash to your original question, but an opportunity to continue to improve cash.

So no big working capital uses, as you get into kind of a different phase of the project lifecycles here?

No. We're managing that, and trying to be as cash neutral as we can on all of the projects we're looking at.

Okay. Great . Thanks a

And we'll go next to Martin Molloy with Johnson Rice.

Good morning. Could you talk about how important it is to KBR -- or it could be to KBR for some of the petrochemical and chemical projects that are being proposed in the US, utilizing cheaper feedstocks coming out of the shale place?

I think we're seeing just a lot of activity and maybe we're not seeing it in our backlog or prospect list yet, but a lot of the activity in the Houston ship Channel that the ethylene market, which was thought to be dead a couple years ago because of high gas prices, is now viewed as one of the low cost areas in the world because of the low-cost feedstock.

I think it's going to continue to create opportunities for people to build existing chemical and petrochemical projects that are based on gas feedstock.

It's going to drive more combined cycle construction for power. And we're probably going to see some discussion begin about the use of natural gas as a transportation fuel, once some of the projects that KBR's involved in overseas -- mainly Escravos and the Pearl GTL's project -- demonstrate the commercial viability to produce a liquid clean-burning diesel from natural gas.

And so I think you're going to see the market continue to react to what is today an abundant and relatively low-cost resource.

And we expect to see, at least in the next couple years, a strong project market, based on those projects that would employ natural gas as a feedstock.

Okay. And then looking at the Australian LNG market, do you feel like KBR has the potential to book additional FEED for LNG projects over the next 12 months?

We are looking at that. I think one project that we're looking at is the Arrow project, with Shell and PetroChina.

That's certainly much further behind some of the other projects, but we're looking creatively at how could we put together a team that could (technical difficulty) the project, take advantage of possibly some Chinese procurement on that project, and be able to most optimally address the labor situation in Australia.

Thank you.

And we'll take our next question from Bryce Humphrey with BB&T Capital Markets.

Hi, good morning, this is Bryce Humphrey on for Rob. Thanks for taking my question.

When you talk about increasing power market opportunities, specifically on emission control equipment, can you discuss your core competencies there?

I assume primarily construction oversight, PNC types of services. And then also if you have the potential size of that market, it would be helpful.

Well, the capabilities we have, we certainly have approached it from the construction side.

We're just finishing up some scrubber work for LCRA, in Texas, where the scrubbers are in operation and working great.

We are looking to begin acquiring and putting together an engineering capability that would allow us to be a vertically integrated provider of E&C services.

And so that's something that we're developing in-house today. As far as the size of the market, I would refer you to some of the comments that have been made by TVA and AEP, regarding some of their future plan capital expenditures for emissions controls.

I think they're in the -- each over $1 billion going forward. And I think many of the utilities that we'll continue to operate, coal-fired power plants, we'll be looking at some spending on emissions controls.

And that's going to be the best source of where that capital and the analysis of that capital spending will come from.

All right. Okay. That's helpful.

And then to follow up, you mentioned growing combined cycle gas plant opportunities. Similar question there.

Can you discuss your role in those projects, PMC services, can you play a full EPC role on those projects?

We're right in that same discussion with the missions control projects.

We approach it from construction. And again, we're hoping that over time we can build the engineering capability to do a full scope EPC project.

We've looked at some joint ventures with certain engineering firms on that, but it's something that we're looking at playing in.

R&S gets us a little closer on some of the power projects on the solid fire project, where there's material handling, either on a coal-fired project, a scrubber and backhouse, where they are doing turnkey project delivery on that.

But we want to become as KBR vertically integrated on the design, the specification of equipment, as well as the construction where we presently play in all aspects of the power market.

Right. Okay. Thanks a lot. I appreciate it.

> And we'll go next to Robert Connors with Stifel Nicolaus.

Good morning, how are you?

Hi, Rob, how are you?

Good. Just real quick on the GES Plus contract, can you compare the profitability you're seeing there versus the good margins you're reporting for the Jizan, Ras Tanura and Yanbu projects right now?

And then also, as sort of a tangent, does this contract possibly include some of Aramco's overseas downstream JVs that they're going to be taking on?

I think, from a margin standpoint, it positions us as one of, I believe, five entities who will be providing services, hand -- FEED work in Kingdom for Aramco.

It's too early for us to comment on margins. And I don't think it's going to be any lower than what we're seeing on the other work, and depending upon the type of work we have, I think it'll be a very market-based work.

Regarding the overseas work, hard to tell, really. Aramco has so much work in Kingdom right now. And their broader social objective is to create an income in Kingdom capability to do engineering that if one were to think through where that might take them, that it could take them overseas on some of their joint ventures.

Okay. And then you gave some good color on the Ichthys project. But can you also comment on some of the other contracting strategies KBR will be taking in Australian LNG?

Like what portions would you be looking to do on a lump-sum basis? And then where you see that 80% to 20% cost plus fixed price mix when these products are booked?

I think in terms of the projects, I think we're very comfortable with the Skikda model, where we did lump-sum services, all of our services were lump sum, and others were treated reimbursably.

A lot of the work now is being done in fabrication yards where productivity is much more consistent and the scope of work for these projects is better identified.

I think we could see some additional lump-sum or some conversions from a remeasurable work to lump-sum over time on that.

The construction risk of productivity and labor cost in Australia is something that we're very conscious of, and you saw on the Browse FEED that we've partnered with Leighton Holdings, which is a large civil direct-hire contractor in Australia, to work with us on the Browse project.

I think as these projects come in, I do expect our lump-sum margins to increase from where they are today at 20%.

I'm not troubled by it. I think we're very capable of successfully managing a lump-sum component in our portfolio, from these types of projects to a point where we might see up to 50% of the backlog being lump-sum.

Again, it will depend on what risks we're taking, what's going into backlog, et cetera.

But I do not have any issue with an increasing percentage of lump sum of work in our portfolio, because I think we're doing a good job of taking lump-sum risks on those areas of risk that we can successfully manage and looking for alternative strategies to deal with meeting our customers' need on price assuredness on other scopes of work.

So it's going to be a very robust discussion with our customers, much like we had on the Skikda project, and we're looking forward to having those discussions.

Okay. Thanks for the color.

All right, Jason we'll go ahead and take one more call.

Excellent. We'll now take a follow-up question from Will Gabrielski with Gleacher.

Thank you so much for that.

I guess the comments on M&A, you've been looking for a power engineering firm. I think Christmas '09, you and I talked, Bill.

And what's the challenge in getting that in-house and is that going to be even tougher now that we have EPA rules on the schedule and I'm sure those services are in greater demand?

I think what -- we don't see the new EPA rules as being an impediment to moving forward and doing this organically.

I think we looked at the market -- didn't see anything that really fit for us, and so we're going to do it through the direct-hire method.

And I think we offer a lot of interest to employees where we're a big Company with a big balance sheet that's willing, in the power sector, to take lump-sum risk.

We're willing to work not only on the combined cycle projects, which are going to be very prevalent, but are technically a little bit simpler than some of the more complicated emissions control or solid fuel fired projects, like the SWA project.

So, yes, it will be a competitive market. But the differentiators for KBR, vis-a-vis acquiring talent and power, really are no different than what we've been able to build on our hydrocarbon side, just because of the nature of the Company, the projects we do, and the attractiveness of what KBR can do for people in terms of working on the world's most interesting and significant projects.

Okay. And if you'll allow me -- just the credit agreement, I know there's some restrictions in there about how much stock you can buy back in any given period.

Any thoughts on what you're doing with that to maybe give yourselves a little more flexibility?

No. Not at this point. We're not near to bumping up against anything.

And we've got about a year and a half to go, November of 2012, on the credit agreement. So sometime before then, we'll start talking about it.

If we did have an opportunity that did that, we'd go out at that time and talk to our banks.

And given what our balance sheet looks like and our cash flow and all of that, I just don't think that that's an issue.

But for right now, we're not in any danger of bumping up against that.

Okay. Great . Thank you so

Okay. Thank you, everybody.

This does conclude today's conference. Thank you for your participation.