KBR Inc (KBR) 2012 Q1 法說會逐字稿

Welcome to KBR's first-quarter 2012 earnings conference call hosted by KBR. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introductions, I would like to turn the conference over to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead, sir.

Good morning. Thank you for joining us for KBR's first-quarter 2012 conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days at KBR.com. For any of you who missed our press release, you can also find it at KBR.com. 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 first-quarter operating results highlighting a number of key areas. He will then take you through an update on our major prospects and provide his insight on KBR's market outlook. Sue will then provide ana overview of the key financial takeaways for the quarter.

Lastly, before turning the call to Q&A, Bill will provide closing comments. After our prepared remarks, we will open the floor for questions. This call will include forward-looking statements that involve risks and uncertainties that may cause KBR's results to differ materially from management's current expectations. We encourage you to review our Safe Harbor statement contained in the earnings release published last night as well as KBR's most recent SEC filings for a more complete description. Now, I'll turn the call over to Bill.

Thanks Zac and good morning everyone. During today's call, I'd like to cover three main areas. First, I will walk through key takeaways relative to our first-quarter performance. Second, I will provide you with an update of our key prospect list so you can track some of the major opportunities we're pursuing. And third, I will discuss in detail some of the significant market trends and dynamics we are seeing at the present time.

KBR delivered $0.61 on the quarter. This overall operating performance was consistent with our expectations and our guidance and we continue to believe we'll deliver progressively stronger performance in Q2 through Q4. There were a number of areas of strength in the quarter. Excluding LogCAP, revenue was up 5% year over year reflecting the underlying growth in our other businesses. At the consolidated level, job income margins and business group margins were both improved with particular strength in gas monetization and international government defense and support services. Our technology business continued to deliver strong performance with double-digit job income growth in the quarter.

We are very pleased with the ramp up of our Saudi JV KBR-AMCDE. KBR-AMCDE provides in-kingdom technical, engineering, and construction capabilities through local utilization of KBR's world-class engineering tools and work processes. While not a large contributor to the first quarter KBR-AMCDE booked in 400,000 man hours in Q1 and is on a flight path ahead of our initial expectations. KBR's backlog also increased significantly with revenue backlog and job income backlog up 44% and 40% respectively as the JKC joint venture Ichthys LNG project contract was booked into backlog. For the quarter, KBR booked $5.6 billion for the Ichthys LNG project, about $100 million less than we indicated on our fourth quarter call, largely due to currency fluctuations.

The first quarter of 2012 saw two significant points of inflection in KBR's revenue backlog. First, Q1 was the first increase in KBR's revenue backlog since the fourth quarter of 2009. Second, this was KBR's first increase in revenue backlog to be worked off over the next 12 months since last year's first quarter. And we ended the quarter with a strong balance sheet with $837 million in cash and equivalents. As you've noted from our press release, our minerals business unit took first quarter charges that were primarily the result of further increases in cost estimates on one of the legacy Roberts & Schaefer projects. While we are clearly disappointed with the additional charges, we did enter performance testing for this project in Q1 and are therefore confident we have put this particular issue behind us.

With respect to the other two minerals projects we discussed on the fourth quarter call, they are largely progressing as expected with no additional charges that were taken on either project in the first quarter. One of these projects is to be completed during the third quarter. We continue to believe we have strong risk management processes in place for this business and as a result, the ongoing and future projects will continue to receive the double regard and discipline necessary to drive strong operating performance. One other notable area I wanted to touch on for the quarter is our effective tax rate which came in highly favorable at about 9% verses our operating tax rate of 27%. Sue will address the tax rate further in her prepared remarks.

Now, I'd like to provide an update on the major prospects we're pursuing. For the Kitimat LNG project the open-book EPC tendering process is continuing along with pre-FID site construction activities. We anticipate the open-book tendering to be completed during second quarter of 2012 with an FID following sometime in the second half of 2012. For the browse LNG project we are continuing with the EPC bidding process and plan to have our bids turned over to the customer in mid-2012. For the Gorgon LNG fourth train project pre-FEED activities continue and which expect a transition into FEED by the end of 2012. For the Anadarko LNG project in Mozambique, the FEED tendering process is underway. We anticipate FEED awards to be announced by mid-2012.

For the Pluto LNG project, the first train has safely reached start-up and is progressing towards its first LNG cargo. KBR continues to perform various additional studies on the proposed expansion project. Lastly, for the Lobito refinery project we are winding down early stage engineering work but continue to be active with on-site preparation work. KBR stands ready to support the customer once they have completed partner selection and are ready to move into FID. We continue to believe we are well-positioned on each of these major prospects.

I'd like to spend the balance of my prepared remarks discussing some of the key market dynamics we see unfolding over the next several quarters highlighting why we believe this is a great time to be invested in KBR. We may see some short-term fluctuations in the strength of one market versus another, but in the long term this is noise relative to the bigger picture. We firmly believe the long-term fundamental of our end markets are strong and in place providing tremendous opportunities for KBR. In the short term there are a lot of moving parts that are driving the markets. Today's economic climate is challenged by all accounts, and governments and companies alike are taking a hard look at their budgets and economics of their investments. On the down side, we continue to see some projects moving to the right including some of the big elephants we thought were going to achieve FID during the second half of 2012.

Ultimately, we strongly believe these projects will move forward as the economics are compelling. But they may not happen as soon as we originally anticipated which is not uncommon with some of these large, very complex projects. However, whether the projects begin six months sooner or later, it doesn't demonstrably change their economics nor does it change KBR's value proposition as an investment. At our domestic and international government services businesses, we are on track profitability-wise and our proposal activity remains high. However, awards have been slower than anticipated. We believe this may be due to the ongoing debate over future activities in Afghanistan combined with tighter government budgets. We do however believe that work should start being awarded in the coming months.

Albeit early in the year, growth at our US construction and industrial services businesses has been slower than expected. While we still expect both businesses to be up year over year, the present near-turn timing of awards for these businesses remains a bit cloudy. In the building group, multi-family residential and manufacturing construction have come out of the gate strongly but healthcare and higher education spending remain slow. On the upside, KBR continues to see an acceleration of activity in many North American markets particularly in our downstream, technology, and power businesses. These opportunities are driven by the market fundamentals of a favorable natural gas forward price curve that provides compelling economics for new ethylene, power, and ammonia facilities.

Accordingly, we believe that domestic natural-gas based industries will see significantly higher levels of capital investment over the coming years. Low price natural gas coupled with air quality regulations is also driving a compelling value proposition for the construction of new gas-fired combined cycle power plants as older coal-fired power plants are retired. Additionally where the economics favor the construction of pollution control facilities operators will spend capital to meet new emission standards which opens additional opportunities for KBR. Also in North America we are seeing increase in liquefaction and GTL opportunities.

On the LNG front, in addition to the Kitimat LNG project, we are currently looking at two additional LNG prospects in western Canada, one pre-FEED/FEED opportunity on which we are already executing early study work and another opportunity where we are in early but active dialogue with the customer. In the US Gulf Coast area we are looking at bidding a FEED for an L&G project where KBR is currently prequalified. On the GTL side, we anticipate one or more FEEDs for projects in the United States this year. In the Gulf of Mexico we are seeing a resurgence of deep water drilling activity and we expect that this will provide offshore oil and gas opportunities for us starting in 2013 and beyond.

The Canadian marketplace is also showing far stronger levels of investment than originally anticipated. We are seeing more projects moving quickly from the engineering phase to the construction phase and we expect this trend to continue in the coming years. We have approximately $2 billion in tenders outstanding for projects that we expect to be awarded in 2012 including turnarounds, module fabrication, construction projects in the Alberta oil sands, gas processing projects in western Canada, and client camp support. Several of these tenders have already been awarded to KBR and we anticipate making announcements in the coming weeks. We are also positioning ourselves for a stronger mining market in Canada, including mines producing gold, copper, and pot ash. We see this market steadily ramping up and gaining momentum as 2012 progresses. And we expect to see KBR booking new awards starting in the second quarter.

Australia also remains a strong market for KBR. LNG and mining resources are abundant and significant infrastructure build-out continues to drive tremendous opportunities for KBR where we are well-positioned on several major awards. We continue to work through the industry-wide labor challenges that we discussed previously but the Australian labor environment will remain a challenge that we need to execute against for the foreseeable future. In the Middle East, we are seeing significantly stronger activity than expected in downstream infrastructure and other industrial markets. In contrast to the last two years, we see projects continuing to move forward and we believe KBR's experience working in the region over the past several years positions us well there.

On the Sadara project, most of the EPC packages have been awarded with a couple of these packages actually moving into construction. This week, KBR entered into a new contract amendment with our client to provide PMC services through the end of 2014. This contract amendment is approximately $300 million which will be released via work orders through the end of 2014. Additionally, as I discussed earlier, our Saudi JV, KBR-AMCDE, is exceeding our initial expectations bringing local content to the region and building up a solid backlog of work. In other markets such as China and India, KBR continues to make strong inroads leading with our technology business which has had significant success. Now, I'll turn the call over to Sue. After Sue's comments I will provide a brief summary before turning the call over for questions. Sue?

Thanks Bill and good morning everyone. You've all seen our press release on Q1 earnings that we put out last night so I won't go into a lot of detail already covered in the press release. I do however, want to spend a few minutes walking you through some of the more significant financial items in the quarter that we want you to take away from the call.

The first is on general and administrative expenses. First quarter G&A was $55 million, up $11 million from the first quarter of 2011. You will recall that last year's first quarter had timing issues on several cost items for facilities, IT, and incentive compensation programs that pushed those costs into the second quarter. The G&A expense for this quarter is a more normal amount and is within our expectations for our full-year 2012 corporate G&A expenses, between $240 million and $250 million. The full-year 2012 corporate G&A expense guidance also includes an estimated $20 million to $25 million of costs related to the new ERP system.

The second item is related to our overall effective tax rate which was 9% in quarter. Within that 9% range, we had two large discrete tax items that drove the bulk of the delta verses the 27% operating tax rate. The first item resulted from our equity ownership at the Freightlink JV where final tax returns identified operating losses for the final year of operations which provided a tax benefit in Q1. The second item is related to ongoing transfer pricing agreements. Reserves were adjusted for transfer pricing activity that occurred in Q1. We now expect KBR's full -ear 2012 effective tax rate to be in the mid 20s.

The third item is related to KBR's backlog. Building on Bill's earlier comment, revenue and backlog as of March 31, 2012 was approximately $15.8 billion up 44% from December 31, 2011. Overall the backlog portfolio mix at the end of the first quarter was 62% cost reimbursable and 38% fixed price, a significant shift from the 75/25 split in the fourth quarter of 2011. This shift was primarily related to the Ichthys LNG project, a hybrid contract which I discussed in detail on last quarter's call. We feel comfortable with the mix shift as the types of risks associated with the fixed-price components of backlog are ones we have and have traditionally executed well against.

The fourth item is our cash use for operating activity which totaled out at $107 million for the first three months of 2012 compared to cash provided by operating activities of $225 million in the first quarter of 2011. Q1 cash was negatively impacted by increases in unbilled receivables and decreases in advances in our gas monetization business. These are timing issues related to subcontractor claims and other nonoperating invoicing delays. The first quarter of 2011 benefited from collections expected in Q4 2010 totaling $140 million. These payments were received in the first two weeks of January 2011. We continue to expect to have strong cash flows from operations for the full year of 2012.

The fifth item is KBR's balance sheet which at the end of March 2012 remains strong with cash and cash equivalents of $837 million. KBR's total cash was down $129 million from the previous quarter. Of this decline, approximately $50 million represents a reduction in cash from our consolidated JVs and another $38 million represents cash funding of share repurchases, dividends, pension contributions, and CapEx, as outlined in our press release. Lastly, I'd like to briefly touch on our guidance range of $2.45 to $2.80 which we've left unchanged from the original range we gave at the end of last year. Bill outlined the way we are thinking about the key markets with respect to KBR and some of the puts and takes to consider. So, I'll take just a moment to provide some specifics you'll need for modeling purposes going forward.

The only change to guidance is our effective tax rate which as I said is expected to be in the mid 20s. Aside from that, all other guidance items remain unchanged and are as follows. Full-year G&A expenses between $240 million and $250 million of which an estimated $20 million to $25 million is related to ERP. Full-year CapEx of approximately $100 million of which we estimate $60 million to $65 million of CapEx related to the ERP project. Full-year 2012 LogCAP project revenues between $300 million and $500 million and a share account of approximately 148 million shares. And now I'll turn the call back over to Bill for his final remarks.

Thanks Sue. In closing, I will reiterate what I said last quarter as the conversation remains much the same. KBR believes there is a significant quantity of project opportunities both in North America as well as internationally. Principally in the middle east and Australia. It is likely that some projects will be delayed but we should keep in mind that other unannounced projects are likely to 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 and to build a solid pipeline of new awards to further fuel our future growth. With respect to our guidance for 2012, given all the factors we've discussed we believe the range of $2.45 to $2.80 per share remains appropriate.

As I said earlier, there are a lot of moving parts. Some markets have started off a bit slower than we anticipated while others are showing increased signs of strength. Net of all these factors, we expect Q2 net income before tax to be a bit stronger than Q1 and for Q3 and Q4 to be progressively stronger from there as these new awards move from backlog into the P&L. We have a strong backlog of projects that will ramp up as year progresses and we are working hard to capture current and future prospects in the market both of which should help drive progressively stronger performance over the balance of the year.

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

(Operator Instructions)

Scott Levine, JPMorgan.

A question regarding the markets. Obviously a lot of puts and takes in terms of which are getting better and which are getting worse. If you could summarize, maybe Bill, as a whole are you feeling like the markets are recovering in line with your expectations? Maybe if you could highlight one or two markets, versus the last call or two calls, which are getting progressively more visible and maybe which are becoming a little bit cloudier.

I think the markets that are getting more visible for us are clearly Canada and the Middle East. I just see that the amount of bids we have outstanding in Canada is as high as I can remember. Our positioning on those, I think, is very good. I also believe that the last two years in the Middle East have been slow. Last year, there were a lot of political issues in the area. But as we look out at our prospect list of projects we are chasing in Middle East, it's as strong and as diverse as we have seen in some time. So I am very much encouraged by the Middle East and Canada in terms of their relative improvements.

I also think Australia remains a very good market for KBR. I wouldn't put that in the improvement category because it's always, for the last 18 months, has been a very strong market for us and I think continues to remain so for the near term given some of the LNG minerals work and infrastructure work we are doing in Australia. North America's coming back. I think I talked a little bit about some of the delays we are seeing in awards coming out of our North American government business. We think, in part because of the discussions on future activities in Afghanistan and the budget constraints which also impact a little bit the international government defense business. But we do believe those awards are going to start trickling out or start coming out in the second quarter. We think of that as more of a delay as opposed to a dramatic change from our expectations.

Building group is seeing some good markets in the residential multi-family housing as well as manufacturing. But yes, some of the bigger projects that we've relied on in the past couple years in healthcare and higher education, they still remain pretty slow. And I also made some comments regarding the US construction industrial services businesses are slow, but the power business, downstream and technology in North America that are all driven by the shale gas. I think those prospects look great. I think I mentioned on one of the earlier calls that, just as an example, we see 11 different ammonia plants being discussed for development in the United States and for those of you who keep score on matters like that, we haven't built an ammonia plant in the US in 35 years. So we're seeing a lot of announcements on the ethylene, the olefins, the ammonia projects, even some of the derivative plays like the combined cycle power plants that are going forward all seeing great stimulus from what is now thought to be a much lower forward price curve for natural gas in the US for the foreseeable future.

Got it. One follow up if I may on cash deployment plans. A little bit negative. You referenced some of the working capital items in the quarter. But you guys have had traditionally a pretty balanced approach. I was wondering if you could provide an update with regard to thought process on investment, M&A, buyback, what have you.

Sure. As we looked at it, we haven't really changed our stand, Scott, in terms of the items that are available to us which is obviously to return to shareholders with share repurchases and dividends as well as investments, either organic or through M&A. As we have gone through the first quarter, obviously, as you can see, the share purchases were about 205,000 shares so not a great deal of purchasing. Again, we looked at cash and what some of the opportunities were and we made our decisions along with that. M&A obviously is still something we look at but it needs to be something that fits into the portfolio and that is at the right placing. We'll just maintain our stance on what we are going to do with that and look at the individual opportunities and go after the ones that have the greatest return for us.

Understood. Thanks guys.

John Rogers, DA Davidson.

I guess the first thing is, Bill, you gave us some numbers on backlog and the job income in the backlog and then you referenced the 12-month backlog. Any comment on the job income in the 12-month backlog? Is that also growing?

We don't calculate that specifically. The comments related to the 12-month backlog come out of our queue where we talk about how much work will be executed over the next 12 months. I would postulate -- I think postulate is the right word -- that the job income backlog is following the increase both on a 12-month basis as well as an absolute basis. On some of the lower margin projects, [Skathe] is going to start up this year. We are going to be finished construction on Escravos by the end of the year. So I think that would logically follow that the job income backlog should be increasing from the 12-month period as well as in addition to the overall backlog.

Okay. I just wanted to confirm because you talked about some of these projects slipping out. I just wanted to understand how that flows because it seems as if with your backlog scheduled -- I know it's very early -- but it still seems that you should be growing into 2013 with what you have now. At least on the top line. Is that fair?

Well, yes, a lot of it -- well, I think that's our expectation, John.

Yes.

I think we've got to make sure that some of these -- we're starting to see with the Sadara award and some of these awards in Canada we are expecting to announce in the near future, that this is continuing to be manifested by accomplishments, not rhetoric. We've still got to get through what's happening in our government businesses because I think they did come in a little bit lower than we had hoped in terms of the award base. But if things going according to plan and allowing the shifting mix of projects into and out of our near-term horizon, I think we should see a building of the earnings of the Company, particularly later in the year as these projects move from new awards into the P&L and into 2013 as well.

Okay. Great. Oh, and if I could, any update on collections from Mexico?

The collections from Mexico are sitting with the initial judge who has been asked to consider what, if any, impact does an action of a Mexican court have on his initial ruling. And so we remain confident that, based on our analysis, that it shouldn't have any impact and that when the judge gets around to issuing his opinion, that we think it will be another step forward to getting that issue resolved.

Okay. Great. Thank you very much.

Steve Fisher, UBS.

Not sure if I missed it but any way you can quantify what the mining charge was in the quarter and what happened between February and April on that project?

Sure, Steve. As we put in some of the materials, the charges in the minerals business unit were about $8 million in the quarter with the majority of it being on one of the projects that we talked about in Q4. So now that project is entering the commissioning phase, we think we've got it under control. But what you saw in the first quarter was just revised cost estimates to get where they needed to be and the charges associated with that.

Okay. I guess just shifting gears on to the downstream side of things. It was kind of late in the quarter but, Bill, you mentioned certainly some acceleration in that market. I guess I am wondering what kind of projects and activities you have planned specifically for the second half of the year, whether we could see a ramp up there sooner than later?

I think we have some good prospects that are in the Middle East area, not necessarily in the classic Middle East on the Arabian peninsula but in and around that area that we think will go forward second or third quarter, some joint ventures we have with other players as well as projects we are pursuing on our own. Back on the US side, there are a number of olefins facilities that have been proposed. We're having dialogue with those sponsors. They are mentioning phrases like we want to be first to market to capture the advantages, et cetera. And so we're working towards them on those projects. But we are mindful of what it takes to put these projects together. And I think we've got good proposals outstanding or good mature dialogue with the customers that will lead to proposals to see that business grow.

I think what you have seen in downstream is the -- we're probably about 17% through the engineering on the Lobito refinery project which is ramping down in the first quarter. We have seen a ramp up in terms of the staffing we have at Yanbu. That's lower margin work because it's field work than what we do in the home office. Clearly we are going to be ramping back up on Sadara particularly in-kingdom with our PMC activities on that project. So there is a lot of things going on. So I think the business will grow. The margins may be a little bit challenged compared to historical standards because the mix is moving more towards field type activities as opposed to what were predominantly home office service PMC type of activities that we saw throughout a lot of 2011 and tailing off into the first quarter of '12.

Okay. So it's more of a mixed issue. Do you think the margin there would deteriorate from here as the year goes on or kind of flat or could it even improve?

I think the revenue will grow. It's unclear right now about the mix. I say this simply because we are adding a lot of folks in the field. As we bring in the engineering margins that will be accretive to what we're doing but it's also something that may be diluted by the growth we're seeing of field revenues. I feel more comfortable talking about the advancement of revenues in downstream. And I really can't point you one way or the other on the margin side just because of the increase in the field component of that revenue increase.

Okay. That's fair. Thanks a lot.

Jamie Cook, Credit Suisse.

Two questions. I understand -- you said your first quarter was in line with your expectations and The Street was probably off a little. But, one question, is there any area within the first quarter that was better or worse than your expectations even though you sort of netted to where you thought you would be? Then I guess as you think about, as we now have one quarter under our belt, are you more or less confident with the higher end of the range given where the first quarter ended and given as we talk about some of these push outs and projects. I am assuming that's probably more of a 2013 impact, but I just want to be sure. I'll get back in queue after that.

Okay. First quarter expectations, I think we were pleased with the volumes we saw in hydrocarbons. That continues to be a business that's growing. I think it's a strong business for us. It's clearly the most demonstrable, advantaged business we have in the portfolio. The other businesses were okay. IGDSS continues to complete their fixed-price work in Afghanistan nicely and that's helped their margins in the first quarter. We are disappointed with NAGL in the North American government business from an awards standpoint. It's obviously difficult to transition -- the conclusion of LogCAP III, but we have been talking about that for six years now; that was going to wind down. I think we're expecting it to be a little bit challenging from an earnings standpoint given the fall off in LogCAP. I kind of wish services would have done a little bit better. We did okay on G&A, we did okay on labor cost absorption, hydrocarbons was pretty strong.

As you look at your question on the year guidance, we took a hard look at that and we think there are scenarios where we can get to the high end of the range and can even get beyond that. But you have to look at the distribution of -- we could be higher, we could be lower. Sue and I concluded that as we looked at our guidance we felt that the $2.45 to $2.80 felt the best. We didn't feel compelled to change the guidance at this point. I think what's going to be critical for us as we look at the second quarter is how much of these projects that we expect to be released in the North American government business, in Canada and some of the other markets, what kind of impact on do they have on the backlog and how quickly do we believe they're going to get into the P&L during the second half of the year. I think we have been consistent in talking about '12 as an upward sloping year for us. And I think we'll be able to give a pretty clear indication of where we think 2012 will be at our next quarter call because once you get through second quarter, anything beyond that's only going to have a very small impact.

And certainly from our original budget planning, we had expected Kitimat to be third quarter and some of the other projects to be fourth quarter. So those larger projects weren't big contributors to the P&L and certainly from our perspective could be made up by some other projects that could come on to the horizon. We'll know by second quarter and certainly should be able to give a more precise and more narrow guidance regarding our performance, but as of today, we think the numbers we have out there are the best numbers we could come up with and saw no reason to make a change at this point.

And just to be clear though, other projects could come on to the horizon. You sound more bullish on Canada. Is it that type of stuff and Middle East? I just want to be clear where the up side would come from.

We think up side could come from Canada,.

Yes.

It could come from some awards in NAGL because we're got a big backlog there and some of the awards we're talking about would have a very quick book to burn. Some of the Canadian stuff that we are looking at signing would immediately go into earnings and one project would have a book-to-burn in 11 months.

Okay.

So we see those as being the real leverage points for us in 2012, the most obvious ones from our perspective.

That's perfect. Thank you for the clarity. I appreciate it.

Andy Kaplowitz, Barclays.

Bill, in services, I guess I just don't understand what's going on. I mean, the US economy is doing a little bit better, your backlog has been up over the last several quarters, and your revenue has been going down. I am just kind of wondering what's going on in that segment.

Well, within Services we have three large projects in building group. The Boeing construction in Charleston, South Carolina, Children's Hospital in Birmingham, and the Duke Cancer Center which all went forward in 2009 that are coming to a close. They've been just great anchor projects for our building group business. As they wind down, we're seeing a lot of projects in the $20 million to $50 million range. We've got a lot of verbal awards on those that will trickle into backlog during the year. But we don't see replacements for those big three which were all in the $200 million variety for us.

Within the other parts of Services, Canada was particularly slow last year. We're seeing that. We're much more encouraged and very bullish of what we see in Canada for this year. That should help pick it up. The industrial services business, we continue to see our customers do what they can do to defer maintenance. It's a very competitive market out there for them, and they are looking at ways of not cutting our staff but cutting the maintenance spend around these. I think that's maybe a consequence of us doing a really good job of maintaining the facilities and that the construction to replace stuff is a lot less with our involvement.

And we are still trying to get better traction on US construction. We've got a lot of work that our construction teams are doing at Kemper County and other projects. But those construction activities are showing up in the business units because we booked the construction component on EPCs within the business unit and the only thing we are booking in US construction is the construction-only projects that we're pursuing. But we have announced Devon, we've got a couple others that we're looking at that we think will see that build. I would say over the last 12 months most of our construction work as been as part of EPC projects and quite honestly the field staff we have -- we made some comments where we had previously, and this is what I recall having said -- maybe six times as many people in the field at the end of 2011 than we had at the beginning of 2011. But all those have been driven into EPC projects showing up in other business units.

That's very helpful, Bill. Just shifting gears, on LNG -- you are a leader in LNG obviously. The US LNG opportunity has really come up, I think. It's been out there for a while, but people are believing in more I think over the last few months. Of course there is lots of big Australian projects out there. How do you sort of weigh the two in terms of prospects now as you look at them? Obviously, there are some monster Australian prospects out there. We often get questions now about can both regions go forward? Do you now see the US or as you said western Canada being better prospects than some of these big ones in Australia? How do you kind of look at that and maybe throw in gas to liquids as well?

That may take the next hour and a half talking about that answer. I will try to be succinct on that. First of all in the LNG markets, we think there still will be demand growth in China and maybe a little bit lower growth rate than we have seen in the past, but the structural changes we see going into Japan, movement from the nuclear fleet to the gas fleet we think will continue to maintain a robust demand for new natural gas supplies going forward.

Now, in terms of where the supplies are coming from, we do worry about the labor market in Australia. And we can land expats in Australia for about the cost of what we are hiring directly for construction workers. And you've got a very high-cost situation in Australia. You've got some wonderful resources. And so there is some viability there in Australia. But we also want to hedge our bet. You did not mention Africa. We think some of the east Africa LNG reserves that are very prolific will have structural cost advantages for construction in east Africa compared to what we are doing in Australia today. You've got to factor that in, and that's why we're very active in east Africa on Mozambique and some of the projects being proposed there.

Within North America, we also are looking at how do we place our bets there. We obviously see and believe that British Columbia is a good place to be. It's going to be a good export market, much closer to Asia than a US Gulf Coast facility. We are looking at how do we participate in certain US Gulf Coast facilities. We believe the sponsors have the wherewithal, the market presence, the vertical integration in the US markets to be an effective developer of an export facility in the US. Not necessarily relying on purchasing gas at NYMEX, but having their own equity gas in the US in the shale formations that can be used to fuel the LNG liquefaction.

So, net-net, Andy, we are spreading our bets. We are aware that Australia has perhaps some geographic advantages but some cost disadvantages regarding the construction of these facilities. East Africa, I think, is a new entrant in this market that could give some much lower cost options compared to Australia. And then we're trying to spread our bets here in North America to see how that market evolves both in terms of shipping gas to Asia and then possibly shipping some further gas down to Latin America.

Joe Ritchie, Goldman Sachs.

Just following up on Andy's question there on LNG, specifically. It sounds like the opportunities in the US, North America, could be large opportunities over the next few years. I guess my biggest question is really on Australia. We are not expecting any major financial investment decisions for any greenfields projects this year but next year you've got Browse and Arrow. Have your conversations with your customers changed at all regarding the viability of those projects moving forward?

Joe, I think it's mixed. In Australia, we're tracking four projects. You've got, in addition to Browse and Pluto and Arrow, you've also got fourth train of Gorgon. A lot of it gets back to just how prolific are the gas reserves and what is the marginal cost of building facilities. We've seen some discussion in the press. This is not any inside information that KBR has gathered, but there are questions being raised of should the gas at Browse go to the North West Shelf where the assets are already constructed, which some people feel is running out of gas in the next couple years, or should that gas go to a newly constructed LNG facility? A lot of things moving around there in terms of what's the optimum way of monetizing gas resources and so that's one question around Browse.

You look at Pluto, very compelling economics given the foundation project and the investments that Woodside has made. At Pluto, two and three should be very attractive opportunities for them when they do find the gas and elect to move forward on that. Gorgon four the same way. A lot of installed infrastructure on the first three trains. On Arrow, obviously Shell and their Chinese partner do have access to a market. Shell's got a leading LNG position in the global LNG market. So there are a lot of dynamics going on that you can't really say this one will go forward, this won't. But you can see with the discussion going on that there is a concern of how you best rationalize the resources of gas in Australia, particularly in the broader competitive environment against North America and east Africa gas to develop good projects.

That's great color, Bill. Do you have any sense on timing on when this all shakes out and we have a better idea as to how those decisions will move forward?

What we have said is we're going to submit the EPC bids on Browse mid-year. We're still doing work on Pluto. I think Pluto, they've got to a very positive milestone of having first gas and they're getting ready to ship their first cargo. The Gorgon pre-FEED activities are progressing. We think they'll move into FEED by the end of this year. Arrow and the project, that's a little bit disconnected from the others. That will have its own independent life cycle. But we're going to continue to continue to try to play as much of them and then make sure that we have all the bases covered as KBR so that as those projects move forward, we can prepare to move forward with the ones that have the best chance of moving forward and the highest probabilities of achieving FID.

Thanks. I guess one follow up question. As we think more near-term into the second quarter, you mentioned that some of the tenders in Canada have already been awarded. Is there any color that you can give us on the magnitude of what you have already booked into backlog into Q2 and how we should be thinking about whether backlog will grow in Q2 or not?

I will tell you the Canadian backlog will definitely grow in Q2. The awards to date have not been booked into backlog. We are thinking we could as early as next week see the contracts be signed and that would be significant. In terms of the overall book to bill, we're going to watch that closely. The reason I say we're going to watch it closely is, if you remember Sue's comments on the accounting for Ichthys, we booked our 30% share of that project, $5.6 billion into backlog this quarter. As it goes into earnings you are going to see the equity accounting take place on that. So Ichthys will start winding down over time. We are optimistic that with the prospects we see in front of us for second quarter that we really do believe we can get a book-to-bill greater than 1.0.

Thanks Bill.

Chase Jacobson, William Blair.

Hi, good morning. A quick question on the Ichthys project. I think in the press release you mentioned that the gas monetization job income was up partially because of the activity on that project. From the way I thought you had described it in the past, it didn't seem like that project was going to be a major contributor in 2012 or at least until later in the year. Is that moving faster for any specific reason than you had thought?

No. From our perspective, I don't see that as having been a big contributor to gas mon's results. It was nice to have in the first quarter but not anything that really moved the needle in gas monetization at all. It's a big project, and I think it's going to continue to ramp up according to the expectations we all discussed at our last call.

Okay. So won't be more meaningful until later 2012, 2013. That's how we should look at it?

I'm sorry?

It should be later 2012 and into 2013?

We started out with a certain amount of earnings first quarter. It should increase second quarter and continue to increase over through the end of '13. Maybe beyond that, depending on the S curve.

Chase, I think one of the comments in terms of the contributions of Ichthys is, as you look at it, Q1 2012 was the first quarter it appeared. On a year-over-year, quarter-over-quarter basis, that contribution is good because it was its first quarter we had it.

It also offset some of the ramp down on Pearl and some of the projects in the portfolios. In between Gorgon and other projects that they're pursuing it was a really good quarter at gas mon.

Okay. Just a modeling question with the new break out of infrastructure in minerals. from what we can see, there has obviously been a pretty wide range in the margin, in the job income margin in both those segments. Can you give any color on how we should be thinking of it or looking at infrastructure -- it looks about 35 to 20. Is 35 kind of a peak we should be looking at? Is it mid 20s?

What are your units? What units are you referring to when you say 35 and 20?

Job margin.

Infrastructure was benefited by a gain share on a project in the first quarter of '11. I believe it was, we said $10 million. That drove an inordinately high margin. If you peel back the infrastructure business we are running primarily a consultancy in Australia and that delivers 20%-plus job income margins. Now, what I expect to see going forward is that the job margins related to the consultancy business should stay about at that level and the volume of work should stay reasonably consistent.

Where that business is growing is we're growing doing projects in the Middle East and doing some EPC work through joint ventures in Australia. And I expect that because of the way we account for those, we'll see the margins on that segment of work be less than the plus-20%. They may be in the low teens because you are dealing with a lot of [past here]. So if you think about infrastructures having a base load of consultancy work, that ought to be in the 20% range. And then a lot of the growth we ought to be seeing out of infrastructure would be in, I would say the 11% to 14% job income range where that marginal work will be the driver of the increased revenue backlog.

Okay. That's helpful. Thank you.

George O'Leary, Tudor Pickering.

Maybe just looking for a little bit of incremental color on your US/North American market opportunities. If you kind of rank those by segment, LNG and maybe even talk about Canadian versus US versus the pet-chem and ammonia build out and then power, kind of where you think the most strength is and from a timing perspective what hits more quickly.

Well, obviously, the biggest opportunity we have is the Kitimat project this year which will be multi-billion dollar award that will be doing EPC. That is going to dominate any other individual project we see this year in North America. I am excited about what we are seeing in Canada. We have talked about the $2 billion of awards. And we feel with the verbals we have on some of the other prospects, we could have a very good year in Canada from a backlog growth standpoint.

I do like our position in power. We did win one pollution control project in the first quarter. We've got three fairly large bids we're pursuing right now in power. We think our expectation and hope is that we'd get one of these three. And so power does have some opportunities. We're seeing some steady industrial work. We are also seeing some pollution control work start being talked about by our customers. So power's pretty interesting for us. Downstream and technology, I think you just package those up between the ammonia, ethylene, and olefins facilities. We see a lot of stuff. We think those will be strong. I talked about the story around the ammonia market. So I think the gas mon, the Canadian operations, power, downstream, and technology should all have very good years in North America.

Great. Then maybe just one quick follow up. For a new ammonia plant given that they haven't been built in the last 35 years, can you kind of quantify an award potential maybe just on your average size ammonia plant that would be built out?

Not off the top of my head but if you wanted go back and figure out -- if you go back and look at our earlier reports on the EBIC ammonia plant, I think that was the 2008 annual report. I think we were pretty clear on how big that was. I just don't remember what the cost was on that, George, so forgive me for having a senior moment on that. The 2,000 ton a day ammonia plant is about where the state of the art is on ammonia plants. You can find that in some of our historical data pretty easily.

Sure. Thanks very much, Bill.

Martin Malloy, Johnson Rice.

Could you maybe give us an update in terms of your initiative for providing more direct construction services to your customers and when that might impact margins?

We're continuing to evolve discussions with some folks in Australia on that. We expect that we ought to be able to conclude a business plan and arrangement later this year. We wouldn't expect to see any tangible margins or work coming out of that venture until probably the second half of '13, is my best guess right now. Again, that's the greenfield path we're moving on now. If we were to elect with this venture to get to market earlier through an acquisition, well that would change that statement. But just in the way we're looking at it at present, building this thing brick by brick, it's probably second half of '13.

Okay. And then on the Kemper County plant in Mississippi, it looked like it got an important approval from the PSC in recent days. Could that be a meaningful impact to your backlog this year?

I'm not aware of the approval. I knew there was a remanding back from a court in Mississippi to the Public Service Commission to document the detail surrounding the permit for convenience and necessity. I believe that might be what you're referring to. We're expecting to see that. Kemper County was pretty well booked into our backlog last year. The engineering's been booked into backlog. We did book a couple hundred million on the construction. We may see some scope growth on that. I'm not sure yet. But any meaningful changes to our backlog related to Kemper County we're not seeing. We'll probably see the normal type of scope growth around that but nothing in terms of big lump sum changes in our awards.

Okay. Thank you.

Rob Norfleet, BB&T Capital Markets.

Good morning. Most of my questions have been answered. Just one on the backlog as it exists today. I know you've talked after booking as it gets to backlog, in terms of fixed-price work is up to 38% versus 25%, largely due to that contract. I guess I wanted to get your sense as we start booking some of the Sadara works and Canadian works and the North America work. How do you see the fixed price/cost reimbursable component of backlogs looking over the next two to three quarters? And indefinitely do you see because of the higher fixed-price work should that have a positive benefit on the gas monetization margins?

Generally, as we look out at the future work that we're looking to book, the bids in NAGL, North American Government Defense, we expect the awards will be predominantly cost plus. We look at the Canadian work, that's also going to have either cost plus or unit rates. That gives a lot of deviations on scope. So I'm not expecting to see these near-term awards impacting the amount of fixed price work in the backlog. What I do expect is that when we look at a project like Kitimat, we would have a significant portion of that being lump sum. And certainly the areas that we're very comfortable doing lump sum, the home office services, the construction management, the procurement, which we believe is largely back to back with bona fide suppliers to us, can be good opportunities on the margin side without a lot of risk. And I'm not saying there is no risk, but it is certainly manageable risk and risk that we have successfully managed many times over on prior projects. So I think we're kind of where we are now.

I know on the Inpex project we have -- some of this scope is remeasured. What that means is today it's cost plus in the fabrication yards, but once we get the designs complete for the fabricated modules and we can give those to the fabricators, the fabricators now will be able to estimate their quantities. They already know their productivity. So some of that work that's currently reimbursable will convert to a lump sum but in a very, we think, prudent and manageable risk format. So we still could see some movement in the next couple years on the amount of fixed price work on Inpex. But I think it's thoughtfully put together in terms of, at what point do we undertake the fixed-price risk And with respect to the fabrication, we are doing so on what I believe are an appropriate level of known/known such as quantities, weights, and productivities that we think we are very capable of handling as KBR.

Great. That's helpful. Thanks Bill.

Matt Tucker, KeyBanc Capital Markets.

Hi, good morning. My first question is a follow up on how the first quarter results compare to your guidance. In your prepared commentary you indicated the results were consistent with the guidance. You also mentioned that you now expect the tax rate to be lower. Can you just clarify, were you expecting the discrete benefits that you saw in the quarter when you gave your initial guidance? I guess more importantly, excluding those benefits, how did the operational results compare to your expectations?

Matt, let me try to take on some of that. So as you think about the full-year guidance and the tax rate, we gave an overall 2012 tax rate of 28%. That did not include any of the discrete items. By their very nature, a discrete item is not going to come through until an event happens which is what happened in the Q1 items that brought down the effective tax rate. So as you look forward, again, you are now going to plan for those in how we're trying to give you guidance in terms of modeling the overall tax rate. So I think that helps you with that piece.

In terms of how it plays in the guidance, I mean, guidance of $2.45 to $2.80 is going to take into a lot of different moving parts. The tax rate's one of them. Obviously performance in all of the businesses is going to be another, our forward looks. When you meld all of those things together, you can kind of get back to where we were at. So while I would say that we didn't model those discretes into our guidance and we haven't changed our guidance, that there is lots of moving parts and it's very early in the year. So stay tuned from an overall perspective. The operating tax rate was right around 27% for the quarter in Q1.

Thanks. That's very helpful. Then moving onto a couple of your large LNG prospects, Kitimat and Browse. It sounds like on both of those EPC tendering is going on and could potentially be completed well out of the FID on those projects. Was wondering in there is any potential we could hear, any announcements on the results of the EPC tendering ahead of the FID decisions, or if we should assume we won't hear anything until the projects reach FID.

You probably won't hear anything from us until the ink is dry on the contract.

That makes sense. Thanks. Then final question, you mentioned some GTL opportunities in the US. Was hoping you can just provide a little more color on your expectations, when you see final investment decisions on those projects occurring, how confident are you that we could see some GTL get built in the US?

I am pretty confident we will see GTL getting built in the US. The cost of oil is $18 per million BTU; the cost of gas is $2 or $3 per million BTU -- that's a pretty wide spread that should be able to support the construction of GTL. I think we'll see several projects move forward. I think you'll see FIDs -- I'm not anticipating the day FIDs in 2012. I think it will be more like the second half of '13. I do believe they will go forward and that there is a very compelling economic opportunity for those sponsors given where I think the oil prices are going to continue to stay and the low gas price environment that we expect to have in the US for the foreseeable future.

Robert Connors, Stifel Nicolaus.

We are hearing same of the same bullishness on Gulf of Mexico offshore CapEx from some of the service and equipment guys out there. Being that KBR and some other ENCs are a much later cycle, do you believe that Gulf of Mexico work can have a meaningful impact on bookings probably mostly in 2013 or do you see it mostly as FEED work starting to kick up?

I see it as having impacts in '13. I think when we first had the Macondo incident, we said, we're continuing to be strong with Jack St. Malo and Big Foot and the work we are doing in the Gulf. We also said our impact would be 18 to 30 months later. Lo and behold here we are 18 months later and we don't have a lot of volume in the Gulf. So we think as it resumes, there is a natural cycle of beneficiation from that. We think the oil service guys and the drillers will have it first. Then eventually the food chain will get down to the ENC firms like KBR. We are expecting we will start seeing these awards come in in 2013. We may see some earlier FEED work but you are not going to see any big impacts on the Gulf of Mexico work at KBR in 2012. It will be 2013 or maybe towards the second half.

Okay. That's helpful. Then Sue, since you took over the CFO role, your corporate G&As and divisional overhead expense have remained under pretty darn good control. And in addition, your CapEx has pretty much been in line with G&A, so I guess my question is, as you look at the growth that's coming down the pipeline for this Company, where will KBR need to invest because this will really be sort of the first growth cycle for KBR where investors will see it as a stand-alone company?

Absolutely. Thanks by the way for the commentary on G&A and overhead. So here is how we look at it. There is obviously some areas with growth that you have to invest in and to make sure that you've got the right people on the ground to do all of the things that you need to do from a customer standpoint, from a control standpoint, and all of that. So obviously we're going to do those things.

However, we're also going to sit pretty hard on G&A and business unit overhead outside of those areas and outside of proposals because it's great operating leverage for the Company and it's also a good opportunity to make sure that as we invest in this ERP system that we're talking about, that we take full advantage of what it's going to provide for us in terms of automation and being able to do some of the same things with less people. Therefore, you don't have to go out and add. So I think it provides an opportunity for us to do even more work on that part of the business.

Yes, I think as we wrap up the call, I think that was a good call because we are focused on the scalability of the business. We saw that two years ago when we started having discussions on ERP. Our Board approved the program last year. We're off to implementation. I think as this rolls out, I think Sue is very correct that we will be able to grow the business significantly with very small changes in what the G&A line would be at KBR. We remain committed to spend what we need to spend, not necessarily what we want to spend.

So thank you all for joining us. I know we have gone a little bit over your time. We appreciate your questions and we look forward to talking to you at the end of next quarter. Thank you.

That concludes our conference call for today. We would like to thank you for your participation.