KBR Inc (KBR) 2011 Q4 法說會逐字稿

Good day. Welcome to the KBR fourth quarter 2011 earnings conference call hosted by KBR. This call is being recorded. As a reminder, your lines will be in a listen only mode for the duration of the call. There will be a question and answer session immediately following prepared remarks and you'll receive instructions at that time. For opening remarks and introductions, I would like to turn the call over to Mr. Zach Nagle, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Cynthia. Good morning and welcome to KBR's fourth 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 fourth quarter results is 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. During today's call, Bill will provide an overview of KBR's fourth quarter and 2011 operating results highlighting a number of key areas. He will also cover KBR's outlook and provide color around how we see 2012 coming together. Sue will address KBR's operating performance, financial position, backlog, and other financial items in greater detail. After our prepared remarks, we will open the floor for questions.

Before turning the call over to Bill, I'd like to remind our audience that today's comments may include forward-looking 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, 2011, KBR's quarterly reports on Form 10-Q and KBR's current reports on Form 8K. You can find all of these documents at KBR.com. Now I will turn the call over to Bill. Bill?

Thanks, Zach, and good morning, everyone. First off, I'd like to start by saying how pleased I am with KBR's results for the fourth quarter and for the full year 2011, with earnings per fully diluted share of $0.60 and $3.16 respectively. KBR's full year 2011 net revenue of $9.3 billion was in line with our expectations, and, when excluding the LogCAP project, was up 4% compared to 2010. We ended 2011 with a strong cash flow from operations of $650 million, a cash balance of $966 million, and we returned approximately $148 million back to our shareholders. KBR's execution across our legacy businesses remains strong. Business unit income margins continue to strengthen and were 8.5% for 2011. Good overhead management and cost control within our business units contributed to the margin expansion. KBR's backlog at December 31 was $10.9 billion. While fourth quarter backlog was down sequentially, KBR's backlog at the conclusion of the 2012 first quarter will increase significantly driven primarily by the booking of the Ichthys LNG project.

As we close the fourth quarter, I was disappointed by the $25 million in additional costs and schedule charges for three legacy international projects at Roberts and Schaefer. The projects were impacted by supplier delivery issues, damaged on-site equipment, and related schedule delays. We are dedicating extra management time and focus to get these projects back on track with two of the projects now scheduled for completion at the end of the 2012 first quarter, and a third for completion by the end of 2012. With Roberts and Schaefer now fully integrated into KBR, we expect to see significant improvements in project execution going forward.

Now I would like to talk about KBR's businesses. At gas monetization, the fee for the Kitimat LNG project is essentially complete while pre-FID site construction activities continue. We are currently in an open book EPC tendering phase, which should be completed during the second quarter of 2012. At the Browse LNG project, during the fourth quarter, we moved into a bid quality FEED extension, which is now essentially complete. We are currently in early phase for EPC bidding with bids due in mid 2012. For the Gorgon LNG fourth train, pre-FEED activities continue with an expected transition into FEED in mid 2012. In Africa, for the Anadarko LNG project in Mozambique, pre-FEED is complete and the FEED tendering process is underway. We anticipate FEED awards to be announced during the first half of 2012.

At the Pluto LNG project, KBR continues to provide support to Woodside on the Pluto Foundation project and is currently performing various additional studies on the proposed expansion project. At KBR's Downstream business unit for the Lobito refinery project, Sonangol continues to discuss equity participation with at least one potential partner. We will continue to execute early-stage engineering for the project through the first quarter of 2012. On the Sadara project, only one FEED envelope remains to be completed. KBR continues to provide resources and key personnel at the site as well as coordinating PMC and pre-EPC support activities. Regarding Aramco's GES Plus initiative, I am pleased that the KBR AMCDE entity has been formally accepted by Aramco as a preferred provider. The GES Plus contract will increase in-kingdom, technical, engineering, and construction capabilities through utilization of KBR's world-class engineering tools and work processes. The KBR AMCDE's office has approximately 400 people and will provide front end engineering and design, detailed design, procurement, and project management services. KBR also expects over time to use this entity to perform engineering works outside of the hydrocarbon sector in Saudi Arabia. KBR anticipates approximately $70 million to $100 million in revenue per year from the KBR AMCDE entity.

In North America, we continue to see increased EPC opportunities driven by low priced natural gas and natural gas liquids for new ethylene and ammonia facilities, which should benefit our Technology, Downstream, and US Construction business units. We expect to see several new large projects go forward in these markets over the next two years. In 2011, KBR's Technology business unit had another outstanding year and continues to grow rapidly. 2011 revenue increased by 30% and job income was up 36% compared to 2010. Technology also had a strong sales year with backlog up 28%. During 2011, KBR sold two more VCC Technology Licenses in China and Russia through our collaboration with BP. We are ahead of our original sales plans for this technology and have already identified several more prospects for 2012.

In 2012, we plan to report a stand-alone Global Minerals business unit headquartered in Australia as part of KBR's strategy to better participate in the strong growth potential in the mining, minerals, and material handling markets. KBR Minerals is currently supporting mining operations all over the world and providing integrated solutions to meet the needs of complex mining developments, including power, water, roads, camps, bulk materials handling, and port and marine infrastructure. The Power and Industrial business unit had an outstanding year for backlog bookings, up over 300% from the beginning of 2011. Recent clarification of the MACTs rules as well as the judicial stay of the CSAPR rules should give rise to an increase in air quality control projects in 2012 and 2013. Additionally, the announced retirements of some coal-fired power plants are expected to give rise to the construction of new gas fired combined cycle power plants over the coming years.

The International Government, Defence and Support Services business unit had a very successful year in 2011 with revenue up 2% and job income up 45%. The increased job income was driven by improved construction margins on the Allenby and Connaught project and several other projects in Afghanistan. At the end of the fourth quarter, [IGD and SS] was successful in winning the rebid of the Afghan ISP contract for the UK Ministry of Defense. For the North American Government and Logistics business unit, in December, KBR successfully completed 10 years of LogCAP III work in Iraq providing support to the US forces for operations, Iraqi Freedom, and New Dawn. During 2011, KBR successfully closed or transitioned 24 locations where we provided full or partial services, disposed of or transitioned approximately $1.5 billion of property, and de-mobilized or transferred over 25,000 employees, subcontract workers, and local hires.

I am extremely proud of KBR's support and commitment to the US military over the last decade and of our efforts to successfully complete the drawdown. The completion of the drawdown marks the end of the LogCAP III contract for KBR. The US mission in Iraq is now transitioning to LogCAP IV for base life support services for the US Department of State, and we are beginning our next phase of work in Iraq. The LogCAP IV State Department task order is valued at over $500 million for one year, plus one option year. Additionally, during the fourth quarter, KBR was successful in securing new work for the US Army Europe Support Command to provide base operations and support services throughout their 51-country area of responsibility as well as a contract for the US Army Corps of Engineers to provide electrical power generation in support of US military operations at forward operating bases in Afghanistan.

Over the past several months, KBR has received favorable outcomes on several high-profile cases related to the LogCAP III project. We continue to see favorable results generally at the appellate court level including affirming laws clarifying protections afforded by employers under the Defence Base Act. We are pleased with the progress arising from our judicial system, and we will continue to vigorously defend KBR in our remaining LogCAP III related cases.

The Services business group continues to build on the strong momentum we are seeing in the North American markets driven in part by the attractive natural gas price environment. New awards and adjustments during the fourth quarter are the highest since the end of 2009. For 2011, new awards and services are over 2.5 times the total new awards in 2010, driven by the Industrial Services and US Construction business units. We expect continued growth during 2012 as well, as evidenced by our recent awards for construction of gas plants in Oklahoma and British Columbia. Ventures had a strong year with 36% growth in job income compared to 2010. The improved operating performance at the EBIC ammonia plant as well as higher ammonia prices were a significant drivers of Venture's results.

Finally, in addition to the growth in KBR's Field Service Construction teams, KBR also continues to grow our resource center headcount as well, which, at the end of the fourth quarter, was up 6% compared to the prior year fourth quarter. Sequentially, headcount was down slightly due to reduced staffing at a procurement service center in Dubai supporting the LogCAP III project.

Before I turn a call over to Sue, I would like to comment on a few 2012 items. First, on February 9, KBR announced that its JKC joint venture had signed the EPC contract for the Ichthys LNG project valued at approximately $15 billion. KBR expects to book approximately $5.7 billion into backlog representing KBR's professional services to be provided to the project, plus our 30% share of the anticipated project cost, net of JKC supplied professional services. KBR will be actively involved in the project's modular design, management oversight for module fabrication, and on-site construction. The modular construction will utilize several Asian fabrication yards to construct the planned 180,000 tons of LNG modules.

I would also like to report that in February KBR successfully concluded our three-year independent corporate monitorship related to KBR's 2009 plea under the US Foreign Corrupt Practices Act case. Overall, the engagement with our corporate monitor was a positive experience for KBR. We remain committed to consistently doing the right thing every time, and our commitment to compliance is a fundamental part of KBR's culture. In fact, our compliance programs are paying off in terms of new work as we were recently awarded an international project where our compliance program was a differentiating factor in KBR securing the work.

As we continue to look at 2012, we feel our guidance range of $2.45 to $2.80 per diluted share remains appropriate. We see KBR's financial performance becoming progressively stronger during 2012. What drives this backend loaded performance is achieving FID on several large hydrocarbon EPC projects in the second half of 2012, the continued ramp up of LogCAP IV work for the US Department of State in Iraq, and the movement of new awards from backlog into earnings over the course of 2012 in both Power and US Construction. For 2012, KBR expects high teens business unit income growth at Hydrocarbons, while IGP is expecting to see a decline in business unit income also in the high teens. We are also expecting strong business unit income growth at Services, consistent with the continuing recovery in the North American construction and maintenance markets we saw throughout 2011.

Now I will turn the call over to Sue. After Sue's comments, I will comment on KBR's market outlook before turning the call over for questions. Sue?

Thanks, Bill. Consolidated KBR revenue totaled $2.1 billion, a decline of $246 million or 11% from the prior year fourth quarter. As expected, LogCAP revenue decreased $222 million compared to prior year fourth quarter. Positive revenue contributions included a 39% revenue increase for International Government, Defence and Support Services, Technology up 34%, and Infrastructure and Minerals revenue up 67%, primarily related to the additional project revenue from the R&S acquisition and recently awarded projects.

Consolidated operating income was $136 million in the fourth quarter of 2011, compared to $148 million in the fourth quarter of 2010. Business highlights comparing the fourth quarter 2011 to the fourth quarter of 2010 include gas monetization increased two percentage points due to reduced work on the lower margin Escravos and Skikda projects in the fourth quarter 2011. The Gorgon, Escravos and Skikda projects continue to be the majority of the revenue and income in the fourth quarter for the Business unit and are progressing nicely. Technology margins increased 12.5 percentage points primarily related to the sales of proprietary equipment for an ammonia plant in Brazil. The fourth quarter of 2010 included an unfavorable jury verdict on a project dispute.

North American Government and Logistics margins improved 6.4 percentage points on reduced volumes but higher margins on LogCAP projects and the higher margin impact of other projects. The fourth quarter of 2011 also included a final $3 million award fee on LogCAP. International Government, Defence and Support Services margins improved 11.8% related to improvements on the Allenby and Connaught, Afghanistan ISP, NAMSA and CONLOG projects. The Allenby and Connaught project also included an inception to date adjustment for the overall margin improvement. Power and Industrial margins improved by 6.7 percentage points related to execution of the waste-to-energy expansion and coal gasification projects, plus the resolutions on the activated carbon environmental project. As we've mentioned previously, Power and Industrial were back logged 339% in 2011.

Infrastructure and Minerals had a loss of $7 million for the fourth quarter of 2011, primarily related to the charges booked on three legacy projects from Roberts and Schaeffer. These projects had material supply issues, a piece of equipment that needed to be replaced, and project delay related costs. Two of the projects are now scheduled for completion at the end of the first quarter of 2012, and the third is expected by the end of this year. Net income attributable to KBR for the fourth quarter of 2011 was $0.60 per diluted share compared to $0.51 per diluted share for the prior year fourth quarter. Favorable tax items added to solid operating performance for the fourth quarter of 2011.

Let me share a few other financial highlights. General and Administrative expenses for the fourth quarter 2011 were $51 million, or 2.4% of revenue. KBR continues to focus on and improve performance in G&A expenses. Our full year 2011 corporate G&A expenses are $214 million, which is below our previous guidance of approximately $220 million. Included in the full year 2011 G&A expense was $12 million related to our new ERP system. Labor cost absorption income of $3 million in the fourth quarter, down $3 million compared to the third quarter of 2011, and down $5 million for the fourth quarter of 2010. The decrease in the third quarter primarily related to lower utilization for fourth quarter holidays.

As Bill stated previously, our headcount in the labor resource pools at the end of the fourth quarter were up 6% compared to the prior year fourth quarter. However, the resource center headcount was down about 2% compared to the third quarter related to reduced staffing, at a service center due to the LogCAP III drawdown. Our overall effective tax rate was 19% in the fourth quarter of 2011 and 6% for the full year of 2011, which is in line with our previous guidance in the 6% to 9% range.

I would like to discuss KBR's backlog in a bit more detail building on Bill's earlier comments. The revenue backlog as of December 31, 2011 was approximately $10.9 billion. Compared to the prior year fourth quarter, KBR's revenue backlog is down 9% while job income backlog increased 4%. Compared to the fourth quarter, revenue backlog declined 6% and job income backlog decreased 5%. Overall, the backlog portfolio mix at the end of the first quarter was 75% cost reimbursable and 25% fixed price comparable to the 77/23 split in the third quarter of 2011. Quarter-over-quarter, Hydrocarbons' backlog declined $424 million primarily due to general project workoff and gas monetization and partially offset by increases in the Technology business unit. IGP's backlog was down $435 million, primarily driven by the completion of the LogCAP project. Services backlog increased $124 million from the third quarter as a result of several awards for maintenance services, small capital construction, commercial buildings, and a turn around.

Next I will discuss our liquidity and balance sheet. Total cash provided by operating activities for the full year 2011 was $650 million, compared to $549 million provided by operations for the full year 2010. Total cash provided by operating activities in the fourth quarter of 2011 was approximately $338 million due to strong collections and working capital management. Our focus on cost control and budgetary discipline is producing results. At the end of December, 2011, our balance sheet remains strong with cash of approximately $966 million, which included $244 million associated with our consolidated joint ventures. The $966 million, up $276 million, compared to the sequential quarter, also reflects a return to shareholders through share repurchases as of approximately $22 million, $7 million in dividends, and capital investments of approximately $17 million for a total of $46 million.

For the full year 2011, KBR deployed $494 million in cash through $189 million in acquisitions, $118 million in share repurchases, $83 million in capital expenditures, $74 million in pension contributions, and $30 million in dividends to shareholders. This balance deployment is 38% acquisitions, 30% return to shareholders and 32% for pension and capital expenditures. We repurchased 818,000 shares under our August authorization at an average price per share paid of $25.99 in the fourth quarter. For the full year 2011, we repurchased approximately 3.9 million shares at an average price of $29.23 per share for $118 million in cash under our August authorization and sweeping programs. The shares repurchased under the new authorization were approximately 2 million shares, and 1.9 million shares were purchased under the sweeping program in 2011.

Also in the fourth quarter of 2011, KBR entered into a new $1 billion five-year unsecured revolving credit agreement with a syndicate of international banks replacing the three-year unsecured revolving credit agreement dated November 3, 2009. The credit agreement can be used for cash advances and the issuance of up to $1 billion in letters of credit for general corporate purposes. Over the past several months, many of our analysts and investors have asked about our euro denominated exposure. KBR currently has little exposure to the euro on our balance sheet.

I would like to provide additional details on KBR's 2012 guidance we provided in December, 2011. The guidance range of $2.45 to $2.80 per diluted share is based on the following -- an increase in consolidated revenue over 2011. KBR expects revenue increases in all business units except the previously guided decline at North American Government and Logistics.

Full year General and Administrative expense guidance between $240 million and $250 million, of which an estimated $20 million to $25 million is related to the new ERP system. Full year capital expenditure guidance is approximately $100 million, of which an estimated $60 million to $65 million is related to the new ERP system. Anticipated full year 2012 LogCAP project revenues between $300 million and $500 million, estimated 28% overall effective tax rate and, as outlined on the front page of the Form 10-K, the shares outstanding at January 31, 2012 were approximately 148 million shares, which would be a good figure to use in models. As Bill commented earlier, we see KBR's financial performance becoming progressively stronger throughout 2012. FID on several large hydrocarbon EPC projects in the second half of 2012, the continued ramp up of the LogCAP IV work for the State Department in Iraq, and the movement of new awards from backlog into earnings over the course of 2012 in both Power and US Construction are driving the 2012 quarterly earnings progression.

Lastly, let me take a moment to help you walk through the backlog and P&L components related to the Ichthys LNG project. Our Form 10-K backlog disclosures for unconsolidated JVs describe our current and historical practice of booking our percentage ownership of the joint venture's estimated revenue, net of partner services, plus KBR related services. Backlog revenue will be worked off by the percent of job completion to movement to P&L revenue for KBR services and adjustments. The Ichthys LNG project is a hybrid contract which will be comprised of services, construction, and procurement elements. P&L revenue will consist of KBR's share of the project's earnings on a percentage of completion basis representing our portion of equity in earnings from the JV, plus the revenue from KBR's services to the project. Job income will reflect the percentage of completion based on equity earnings equal to the revenue component as well as profits from KBR services.

Now, I will turn the call back over to Bill for his final remarks. Bill?

Thank you, Sue. I'd like to provide a general outlook for KBR's markets and businesses. From a market activity standpoint, as of December 31, KBR's outstanding bids and proposals are up 36% from the prior year. It is easy to see the high degree of activity in the LNG minerals and infrastructure markets in Australia, where KBR is well-positioned on several major awards across these industries. We do, however, see labor shortages continuing to develop in country, and foreign ex-pat laborers becoming more prevalent across many of these projects. Project sponsors are aware of these constraints, and along with their contractors, are taking proactive steps to minimize these impacts on their projects. We are also seeing continued strength in the export markets for LNG and other commodities, coming out of Australia.

After a seemingly quiet year in the Middle East, KBR is expecting an increased level of activity in the downstream infrastructure and other industrial markets. There still appears to be some residual apprehension from the recent political turmoil in the region, but we are expecting projects to go forward in 2012 at an increased rate. We are also pleased to see the increased level of activity emerging in the African continent. While the timing of several projects remains unclear, we do see an emerging commitment to undertake more projects, perhaps at a higher level than in the past four to five years.

KBR continues to see an acceleration of activity in the North American markets. During 2011, the US became a net energy exporter for the first time since 1949. Given the expected near term natural gas forward price curve, we believe that domestic natural gas-based industries, once considered as globally noncompetitive, will see significantly higher levels of capital investment over the coming years. We also expect to see continued growth in capital spending in both the power and industrial sectors of the US economy. In Canada we expect the increase in capital spending in the oil sands and minerals markets to continue during 2012.

In closing, KBR believes there is a significant quantity of project opportunities in both in North America as well as internationally. It is likely that some projects will be delayed, but that other unannounced projects could go forward in their place. Ultimately, these projects will get built Only their schedule remains uncertain. KBR's near term challenge is to continue to devote our resources to those projects that are moving forward in the near term. 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)

Joseph Ritchie, Goldman Sachs

Good morning, everyone. Thank you for the clarity on 2012 guidance. I was hoping that, Bill, maybe you could comment on your confidence in the range and in the range specifically -- it is still a fairly wide range of $2.45 to $2.80. What swings at the low and high range for you in 2012?

Joe, I think what swings the low and high range is the timing of projects -- of large EPC projects in the Hydrocarbons business achieving FID. We think we've got a lot of projects that we are chasing, and we believe we've factored in a very practical view on what will go forward and what may get delayed into the later years. So that's really the biggest driver. I think the guidance -- we tried to give you a little bit more clarity particularly in terms of shaping the year in 2012. Obviously, we've come off a big effort on LogCAP to get the troops out of theater, but we are now just beginning to ramp up the work on the State Department, which is going to get stronger throughout the year. But, obviously, with the transition, we expect to see some businesses have growing earnings profiles during the year that we wanted to communicate during this call to the Street.

Okay that that's helpful. Bill, I guess you're confidence in achieving that range?

Joe, at this stage I think that the range is good. Obviously, we've got a lot of moving pieces still in the portfolio, a lot of work to get done. I'm comfortable that the work will get done. As we get into the year, we will continue to do our best efforts to narrow the range that exists there. But, as of today, we are pretty comfortable that the guidance we have is appropriate and that we are going to do everything we can to do our best with respect to the guidance.

Okay. That's helpful. One follow-up question on Ichthys. Can you provide some commentary on the earnings impact of that project in 2012 and how that accelerates into 2013? I would imagine that you would really start to accelerate your income from that project in '13. Any color there would be helpful.

Okay. I would say from a professional services standpoint, the margins on our services are market-based margins. We are probably going to see the work on the project from KBR Services standpoint be more later as opposed to earlier. We are not doing the design of the LNG trains. That's being done in Japan. We are supporting that design effort, but the bulk of the KBR Services that will be provided will be in fabrication oversight as well as the construction management, which will occur -- which will increase, obviously, from '11 -- from '12 to '13. We should hit our peak probably in late '13 through 2015 on the professional services side. In terms of the underlying project profitability, we will see a traditional percentage of completion recognition of project profitability based on the normal S-curve that we have on all projects, so it will be ramping up during 2012. It will be stronger in '13 and '14 and probably plateau in '15 and start coming down as we get into '16.

Okay, great. Thanks, guys.

Matt Tucker, KeyBanc Capital Markets.

My first question relates to the Roberts & Schaefer projects. Could you talk a little bit about, with those three specific projects, how confident you are that the issues encountered in the fourth quarter will be contained in the fourth quarter or what kind of risk you have of those things creating additional losses going forward? And then could you also talk a little bit about what you've changed in terms of the project oversight at Roberts & Schaefer to ensure that you'll have other projects of this kind, and how confident are you that you are not going to have other issues like this on other projects with them?

Okay. Matt, we bought Roberts & Schaefer at the end of last year, and we had a very specific integration plan that would put in place for the business. The first elements of the business were to get them up on our SAP system, to get the people transitioned to our human resources plans and programs and then to also bring them into our universe on the business development oversight. I think those have been done. And, as we have looked at projects coming into the Roberts & Schaefer portfolio, since the acquisition -- and we put the business development oversight process in pretty quickly -- I think we are pretty good on the backlog that we have acquired since the acquisition. Now, again, it's an organization of a couple hundred people, and we can very easily, as KBR, overwhelm them in terms of this transition. We did begin to bring in the project management reporting very quickly.

What we were only able to do late in the year was to bring our trending in, which is a nuance in the project management systems where we drive a little more forward look into to what are the trends on the projects and how we expect to complete them. We found that as we develop this trending, that issues arose on the three projects that we spoke about. The good news is two of them are supposed to be done in the first quarter, which intellectually limits your exposure. I think speaking -- we've reduced through our investigations, both the probability in magnitude of any subsequent charges, although I can't say with a guarantee that they are going to be clean, but we have certainly brought the full KBR rigor on those. We also believe that as a look at the remaining project that gets completed in 2012 that our rigor has brought in the additional trending that we expect to see for the projects to be completed according to the provisions we established in the fourth quarter.

Thanks. That's very helpful. When I look at the fourth-quarter margins, even with the project losses, they were above what you did for the full year. If you back the losses out, they were quite impressive. Could you comment on whether there was anything one time-ish that drove the margin strength, or would you attribute that more to the improving job margin profile in your backlog?

Matt, this is Sue. I think as you look at it and you think about the comments that I made my portion of the script -- if you look at the hydrocarbon space, gas monetization was up because they had a little less work on a year over year basis from Skikda and Escravos. And those are lower margin projects. That was a natural lift. Technology margins were good, and they are just executing well. As you think about the other businesses in terms of one timers, I talked about the International Government and Defense and Support Services with the Allenby and Connaught project. In that one, the margins did improve, and I will continue to say that that's good operating performance. But what does occur on a project like that one, when you get a margin over lift as you do have an inception to date catch up on that margin, which did appear in the fourth quarter. But, other than that, pretty clean and good operating performance.

And the LogCAP III award fee of $3 million.

Yes. $3 million.

Thanks. I will jump back in the queue.

Andy Kaplowitz, Barclays Capital

Good morning. It's [Alan Fleming] standing in for Andy this morning. Thanks for taking my questions. I wanted to start off with a question about what you're seeing kind of on the upstream side of the business in North America. A couple of competitors have booked some large projects in the oil sands. I'm wondering what you are seeing kind of specifically in that region, and maybe if you could actually comment also on one of the competitor's large acquisitions in the last couple of days in that -- for a business that operates in that region and what that could do to the competitive landscape. Thanks.

On the upstream North America, we do see increased opportunities in the oil sands region. We have seen some pretty good bidding on some modules, particularly by some of the larger players in that market, which is a good indicator of additional construction work to install those modules that will follow. So the oil sands does appear to be moving up. I know in some of the notes I've read that several of our competitors feel strongly about it as well. So our view of the oil sands is no different. We are seeing -- we are coming through, perhaps, the Macondo drought in the Gulf of Mexico regarding the offshore oil and gas. Projects are starting to go forward. We are seeing some drilling activity resume. And we would expect our North American oil and gas business to pick up as these developments continue to mature and the cessation of activity related to Macondo clears.

From a downstream standpoint, we see lots of activity in the -- as I mentioned, in the ammonia and in the ethylene markets. We are seeing good industrial and power activity. We are seeing a lot of bidding activity for LNG projects, while maybe not upstream, in the oil and gas world, they are upstream for us. We are involved, obviously, in Kitimat. We are seeing other developments begin to develop in British Columbia. We are seeing the development of export facilities or the concepts or permits being filed for potential export facilities out of the US Gulf Coast. So we see just a pretty robust market going forward, and we think it is a good time to have an integrated EPC position as KBR in the North American market.

Regarding the large acquisitions by a competitor in recent days, honestly, we don't think that changes the competitive dynamics all that much. We haven't increased the supply of engineers or constructors. We've simply change the shareholders of that entity, so we don't see any material changes arising out of that acquisition.

Okay, thank you, Bill. Is there any -- do you have any update on the timing of a FID for Kitimat?

I think -- we have to get back and rely on what Apache is saying. We are working for them. We think we will have our activity completed during the second quarter, and then it's really up to them to comment on how the other elements of the project come together. They, obviously, have to look at EPC, but they've got their permitting to do in British Columbia. I don't know where they stand specifically on gas sales, for example. They are the ones who are trying to integrate a lot of different pieces of which KBR is simply but one piece of that puzzle for them.

Okay. I will get back in queue. Thank you for the color. I appreciate it, Bill.

Rob Norfleet, BB&T Capital Markets

Good morning and congratulations on a great year. Just a couple quick questions. I guess first, when we look at IGP, clearly, the bookings in the quarter as you discussed on the call, you and Sue, were down mostly because of the line down at LogCAP III. But if you look at Infrastructure and Minerals as well as Power and Industrial, they were a little weak. I'm just curious -- is that more of a seasonal issue or was there some timing in terms of slipping from Q4 to Q1?

Well, on Power and Industrial, we did have a good industrial booking during the fourth quarter for an EPC project. For Power, we try to look at it over a longer horizon. The increase in backlog that we had during the year, I think Sue was quoting 339% increase, was great. Those guys did a heck of a job this year and we are counting on them to continue that good work during 2012. So a fourth quarter event for the long-duration projects that P&I books is not a material concern for us. On the I&M side, we've brought in a new business unit leader, Mark Read, for the minerals business. I've seen firsthand from a recent trip I took in Australia the very good high-level connections he has in the Australian mineral space. I think he brings a lot of energy, a lot of contacts, a great resume for being a minerals participant, so I think we will see our Minerals business grow and become a key part of KBR going forward under his leadership.

On infrastructure side, you have the timing of issues. We've got some work that we are pursuing in the Middle East that -- one project was awarded back in April, but we are still with the Middle East way of negotiating contracts and some of the political overhang we see in the region, we still haven't got that award in the books just yet, but it is something that we are optimistic that our Infrastructure business will grow. As we simplified I&M to two separate business units, one infrastructure focused, one minerals focused, I think we will see better performance out of the two because of the dissimilarity that existed between the two markets.

That was helpful. Thank you. And my follow-up would just be on the climate control equipment market, obviously. Obviously, with the EPA standards out, we've got CSAPR rulings state, the MATS rule is out there but it's under a little pressure from a litigation standpoint. What are you seeing from your customers? Is there any pushback in terms of ordering equipment, or are they actually going ahead and following the mandates as it relates to what the SOx and NOx, mercury requirements and emissions requirements will be?

I think from a prospect standpoint, we've seen more prospects on the list, so it appears that our customers are more comfortable with the status of the climate control regulation -- MACTs and CSAPR. So it does appear to have some clarity. I think that the absolute that I can say is there's more activity on the front than we have seen in the last year and a half. Whether those projects get awarded or there are subsequent events that we cannot envision that affect for our customers' ability to move forward, but we are seeing a more buoyant bidding environment or prospect environment in those markets than we have seen for some time.

Great. Thanks.

Steven Fisher, UBS.

Cash flow was very strong in Q4. Just wondering why you didn't buy back more stock, and then how you are thinking about cash usage in 2012.

Well, Steve, I think -- thank you for the comment on cash. We did do a really nice job on cash in the fourth quarter. And, as we went through the quarter, you know, we had a defined process for buying back shares. We had a grid at which we were going to buy with numbers of shares, and we followed that all the way through the quarter. So we bought 818,000 shares, and we think that is good. In terms of cash, as we looked at the year, as I said in my comments, very balanced with the acquisitions with return to shareholders, et cetera. As we go into 2012 and look at the cash that's on the balance sheet, the $966 million, same story. We return cash to shareholders when it's appropriate. We are going to do acquisitions if they have the right fit in the margins. We are going to continue to invest in our capital and our ERP system -- you know, just make the best decisions as the opportunities come up.

Steve, I would add that as we looked at what was transpiring in August, at the time we announced our authorization, we were surprised by how quickly the KBR shares came off. Obviously, the events unfolding in Europe had some contribution to the broader market decline, but we weren't sure how long and how far the share price would be at those levels, so as Sue pointed out, we created a fairly thoughtful and disciplined grid that we are buying back, expecting that if the shares remained lower for longer periods of time, we would have a very, very attractive buying opportunity for KBR shares. Today we are revisiting that. Now that we've gotten through the quarter and the various black out periods, we will be looking at what do we want to update, if anything, regarding the share buybacks? Again, as I've commented on prior calls, we take a fundamental view of where we think KBR share value ought to be and a fundamental view of where we ought to transact to buy back shares. So we are keeping with the discipline. We think we are doing the right things. We will see how things evolve in both our thinking in the market, and we will continue to give updates on where our perspectives are, and progress regarding the share buybacks.

That makes sense. And then, Bill, how do you see competition playing out in the US chemicals market? Do you foresee that there is going to be an ethylene cracker for everyone, or will it be more tough competition? And then, how do you see specialty chemicals factoring into the outlook?

I think the US market with the property rights you have here, the free market, all sorts of stuff, you are going to see more developer proposals and a wider array of proposals than you might see in a different area internationally. I think you will see projects go forward. Our challenge is picking the winners. I think there are some projects that we are not sure are going to go forward with as high a probability as others. I like where we are positioned, because we have done a good job of integrating the BE&K acquisition to allow us to do the US-based EPC work. We are doing it on the BP Toledo refinery. We are doing it on Ratcliffe coal gasification facility, Molycorp, KiOR, CARBO Ceramics. We've got a good model.

I think it's a very compelling offering here in the US because of our ability to bring all of the services together for these projects in a way that is a little more challenging for us internationally. You heard some of our comments of how we are going to try to address that on our investor and analyst day. But I think it's going to be a very good market. I think there will be a lot more capital spending in the US market on the chemical side. I don't have any unusual or different insights regarding specialty chemicals, but certainly the forward curve of natural gas, as it exists today, and the expectation that we'll continue to see natural gas availability in the US at very attractive prices for some time now will be a driver for that new capital investment.

Okay. Thanks a lot.

Jamie Cook, Credit Suisse.

Good morning. A couple questions. One, Bill, I think in your prepared remarks you mentioned something about direct labor already starting to become an issue and the use of more ex-pats. So I was just wondering if you could just give a little more color about that. And how that also impacts -- you talked about I think at the analyst day increasing your direct construction content. And you talked about also increasing fab and some pretty sizable revenue opportunities longer-term or I think even said by 2013. I'm just kind of think longer-term out where we are in the process as well as the comments on labor.

Okay. The comments on labor were specifically addressed to the Australian market. In our meetings with the labor ministers within the various states of Australia, as well as discussions with our customers who have even more meetings with these folks, there is a recognition that with all of the projects going on in Australia that you are really approaching full employment of their available labor force including training of the indigenous population of Australia. There has been a recognition that it is necessary to bring in ex-pats from the US, the UK, Asia to do project work, because that work is really, in the minds of the Australians, the bubble or the pig and a snake that we would bring them in for projects, when the projects are finished, those people go away. Where you have businesses that are going concerns that are doing a electric transmission lines, et cetera, that are not project specific, they are not able to get the 457 visas that those of us on the LNG site have been able to get approved by the government. So there is an equilibrium being established. In many respects, we are seeing our ability to land US ex-pats at a cost that is not terribly different than what we are paying the Australia labor because of the scarcity of that resource across the country.

In terms of the efforts on direct hire in fabrication, we are pleased with the progress we've made over the last three and a half months on those two initiatives. We are continuing to address in greater detail how we participate in a direct hire market for certain elements of mechanical, electrical, and instrumentation construction in the Australia markets, and hope to be able to take a lot of the skill sets we have in terms of our processes and systems and marry that with an advanced or enhanced capability on the human resource management and Labor Relations. And so we are still making our progress. Hopefully, we will be able to report later this year on more perhaps tangible milestones than my conversational update here. And the same goes with the fabrication. Looking for those projects that hit our sweet spots in certain locations for FPSO EPC work where we've got countries that we are familiar with, technologies or FPSOs that we are familiar with the design and looking to find that sweet spot for us to move downstream into an EPC opportunity compared to just the services.

Okay. I don't know if you will comment on this, but I will try anyway. I guess as I just looked longer-term out and I look at the estimates for 2013, and I look at some of the revenue targets you pointed out for direct construction and fabrication in the projects that --impacts what you've already got and what's to come. I just look at the revenue numbers out there for 2013 and the EPS, and I scratch my head. Do you?

I'm still working on '12. I'm still working on Ritchie's question and how do I deliver the guidance.

I am past Ritchie.

I know. You have always been a forward-looking individual, Jamie. I think it's probably a little early for us to look at '13. If we get the -- if we get the projects signed up that we believe are out there for us, and we will get them over time, I think you are going to see just a tremendous backlog growth even beyond what we have commented on the impact of Ichthys in the portfolio. I think you will see revenues and profitability go with it. So we've got I think some great opportunities to really organically grow the business, but I also think our shareholders would -- are best served by us looking to do those other things that give us a greater degree of vertical integration across our product offering. And we think we can do both.

All right. I tried. Thank you. I will get back in queue.

John Rogers, D.A. Davidson.

Good morning. Bill, I Appreciate your comments on sort of the status of all the LNG projects, but as I look at these comments quickly, it seems as if you're going to have a big surge in backlog with Ichthys, and then, depending on these, it could trail off through the year but the earnings are going to be ramping up through the year? Just trying to get a little more color there.

Okay, well, the Ichthys earnings are going to be ramping up during the year. We are expecting that the backlog we signed up in Power and in the construction business is going to continue to ramp up across 2011. I think we will see our backlog -- we are expecting to continue to sell good work beyond the Ichthys project during 2012 on LNG. We are expecting downstream to be very active. We are expecting Power to have another good year. We think the North American business overall is going to accelerate for KBR.

When you talk about Ichthys and how we work off the backlog, you've got to remember the nuances in terms of our recognizing revenue as -- excuse me, revenue and profits on a percent complete basis on an S-curve during 2012, plus our services which will grow over the next 12 to 36 months. Then as we work off the percent complete on the cost side of the project, I think the story holds together, despite maybe at a front end level saying INPEX backlog going down, KBR profits going up. But that's just the nature of how our accounting is working with respect to that microcosm called INPEX

Okay. I guess I was just trying to relate it to some of your comments about timing of these projects. Maybe back to Jamie's question about maybe a lull coming in terms of bookings.

We are not sure when what project is going to close. We have a lot of irons in the fire both inside of the LNG business as well as outside of it at KBR. We still think that where we are in terms of our revenue guidance is good. We don't have a backlog guidance we give. We gave you the number on INPEX. Over time it is going to be a continuing growing backlog story here at KBR based on what we've got out there in front of us.

And then just one follow-up -- I guess maybe for you or Sue. The distribution of cash flow that you talked about for 2011, should we think about that same sort of ratios in 2012 between buy backs, investment, et cetera?

I think as you look at it, obviously, the components are the same. As you look at going forward, the pension contribution that we made in 2011 included a $40 million catch-up contribution that we made. I don't expect to make that again in 2012. The acquisitions and return to share holders -- we will see what that split looks like, given what the best opportunities are for us. But I think the items are the same and just what varies is going to be the difference between the share buyback and our acquisitions.

Fair enough. Thank you.

Brian Konigsberg, Vertical Research.

Just coming back to the Roberts & Schaefer projects that impacted your quarterly results. Out of the three projects, can you just give us a little granularity of the two that are ending at the end of Q1? How much did those two contribute versus the third that will be closed out by year end '12?

I think the largest series of the charges were on the projects that will get closed out in the first quarter. It is north of 75% of the charges, maybe 80%. It was $22 million or so of the $25 million was those near-term projects.

Got you. Separately, so Pemex -- it seems they are still making legal noise in regards to the cash they owe you from a project way back when. What is your outlook on actually collecting that? Is that a potential 2012, or is it just kind of TBD?

Well, we kind of watch this with great interest, as do you. It's really interesting for us. I am trying to temper my comments a bit, in that when you enter to a contract with the branch of a sovereign government that's part of NAFTA, and as part of the contract it has a dispute resolution that gets to both parties accepting international arbitration and having completed the project with our disputes, we followed the contract to go to international arbitration, we get a ruling that is, obviously, very favorable for KBR, and then the customer starts forum shopping in Mexico to find a court, any court, that might allow them to overturn the contract. In their mind, void the entirety of the contract, including the international arbitration, after the international arbitration has taken place. So we kind of watch this and we understand what they are doing and why, but it really borders on just trivializing the whole status of the country as a place where it's good to do business.

Now, we've had our District Court finding that was -- that affirmed the arbitration award. It went to the appellate court. The Appellate Court said, well, they want the first court now to consider Pemex's actions after the arbitration after the first court made its ruling to see if it has any impact on the initial ruling by the first court. We think that the court will take a look at the award which they, in the first case, deemed it to be enforceable. We don't believe there's a strong basis for the first court to reverse its initial ruling, and I think they will affirm the initial ruling that the order was enforceable or is enforceable. It will be appealed again back to the Appellate Court. The Appellate Court will say thank you for your ruling. And we expect the Appellate Court to dismiss this and allow us to get the monies that we were awarded through the international arbitration which are supported by a bond posted by our customer in the New York courts.

That being said, we think the issues that are in front of us today are relatively rifle shot issues. We are optimistic that we will get this resolved during 2012 and put this saga behind us. But it's been something to watch to see an entity of a sovereign government try to void a contract that it entered into willingly which included provisions for international arbitration, and try to void the contract after the arbitration award has been made. So a little bit on a soapbox, but, yes, we think we will get it done later this year. That is our expectation.

Thank you very much.

Randy Bhatia, Capital One Southcoast.

If you could, can you tell me when you guys kind of see the inflection point in revenue when this kind of flat to down revenue scenario turns around when the LogCAP fees' impact is less than the increase in revenue that we are going to see on these projects.

I think we are already at the inflection point for LogCAP. One of the things we've been looking at for years was LogCAP and the work in Afghanistan and Iraq used to be 65% of KBR's revenue, and we knew eventually that was going to stop. This year, at a level between 3% to 5% of our earnings. For us it is just another contract. I think the acceleration we are seeing in our Services business, in our Hydrocarbons business, in our non-government businesses and IGP, I think we should expect to see increasing revenues going forward. And, even in a relatively quiet year, a 2011, without any of the LNG awards, we were able to move revenues up 4% ex-LogCAP.

Great. Thank you. Also, if you could just in terms of what you guys are seeing in the near-term, where -- I guess on the same North America and low natural gas price driven theme that has been discussed here at length -- where do you see the biggest near-term opportunities? Is it n refining or is it new gen -- new gas fired gen? What are your -- I mean that in terms of what your customers are saying, as well what you guys are seeing in terms of bid activity.

I think we are seeing good opportunities in Power. I think on a prior call we talked about the amount of prospects we saw out there for KBR on the order of $3 billion. We thought $1 billion of that would be bid during 2012, so that remains steady for us, but what we are seeing -- and this is not a relative statement, this is an independent statement -- we are seeing an acceleration of activities in the North American market for our Downstream business. We are seeing discussions on multiple ammonia plants, which we haven't had discussions in the US on ammonia plants in 35 years. We are seeing a lot of chemical facilities being talked about, less petrochem, but more chemical, where you got natural gas as a feedstock, the ethylene facilities. So Power remains we think a pretty robust bidding environment and the near-term opportunities in our Downstream principally in the chemicals business are growing very attractively for us.

Great. Thank you guys.

Operator, we will take just one more question please.

Robert Connors, Stifel Nicolaus.

The strategy for upstream oil and gas has always been, if I understand it correctly, to build up a pretty good prospect list with FEED work and then eventually to turn that into procurement and construction management services. So it looks you're making some pretty good headwinds along that. I'm just wondering if, going forward, does that segment see a little bit of lower margins as you start to transition into procurement and construction management but offset, obviously, by higher backlog levels.

I think the margins that we see on these projects, Rob, are for the component of percentage of completion based on project profits, that's going to follow an S-curve in terms of what we recognize and how we get profit. In terms of the services, you probably see a little bit better margin when we are doing the engineering and the home office services than in the field, just given the amount of people that are involved and the margin that we have on those folks. I'd say today that we probably have slack capacity in a lot of our front end engineering capability, both in Houston and in London on -- as these FEEDS are getting ready to transition. We are not facing any resource constraints. We think revenues will grow. We think overall just the volume of work will continue to deliver an increasing profitability at KBR, and we still think our business unit incomes are going to increase by virtue of the higher dollar value of job income we are going to get over a relatively stable and constant amount of business unit over head. So, I think we are going to see new opportunities, particularly in our gas monetization business for margins to move up over time because we're -- because of the volume at reasonably consistent margins being amortized across a fixed overhead base.

And what are you seeing as a typical turnaround time for when LNG projects transition from, say, the bid and tender submission phase to full EPC awards, especially considering the fact that there is numerous project operators involved, and all of their boards need to approve these massive undertakings.

Yes, I don't think the board approvals are the constraint because, once people get as committed as they do at the time a board approval is made, their sunk cost are several hundred million dollars, not just to our FEED contracts but to all levels of their value chain and supply chain. These projects take a long time to go forward. I mean, we've looked at the Ichthys LNG project, and we started talking about that in 2006. Gorgon was 2005. So Gorgon, if we start in '05 and it gets the FID in '09, that's probably moving at a -- on the faster side of the average clip. I think you look at the Ichthys project. That took five years to get to fruition. So, that's a typical timeline. And we always worry about whether some of our messaging gets old at KBR when we get a pre-FEED or a FEED, but we look at that as inventory. We look at that as an indication of future growth of the Company and our backlog and our profitability over time. But it is something that just takes time to get there, given the very complex structures that you are putting together, ranging from resource development to the production facilities all the way through your end market sales to customers. So they move like battleships. Once they get moving, it's hard for them to stop. It's just a matter of being able to have the staying power to reel these things in as they ultimately mature at their respective gestation periods.

Okay. Thanks a lot.

Thank you all for your questions.

Ladies and gentlemen, this will conclude today's question and answer session, and this will conclude today's conference call. We do thank you for your participation.