KBR Inc (KBR) 2013 Q1 法說會逐字稿

Good day, and welcome to the KBR's First-Quarter 2013 Earnings Conference Call. 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 instructions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead.

Good morning. Welcome to KBR's First-Quarter 2013 Earnings 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. The press release announcing first-quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President, and Chief Executive Officer, and Sue Carter, Executive Vice President and Chief Financial Officer. During today's call, Bill will provide an overview of KBR's first-quarter operating results, highlighting a number of key areas from each of our business units. Sue will then provide an overview of the key financial take-aways for today's call. Lastly, before opening the call for Q&A, Bill is going to provide brief closing comments. After our prepared remarks, we will open the floor for questions.

Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's first-quarter press release issued last night, KBR's form 10-K for the period ended December 31, 2012, and KBR's current reports on form 8-K. You can find all of these documents at KBR.com. Now, I'll turn the call over to Bill. Bill?

Thanks, Zac, and good morning, everyone. KBR delivered a solid first quarter with earnings per share of $0.59, in line with our expectations. Overall, we had strong execution across our businesses, which drove operating income up 19% year-over-year with operating margins up more than 150 basis points. We also maintained our focus on prudent cost controls in the quarter, keeping SG&A flat year-over-year as a percentage of sales. Additionally, KBR achieved a number of key project milestones in the quarter, delivering first gas at Skikda and first iron ore at Hope Downs 4. Relative to the five problem projects we discussed in our fourth-quarter call, our execution was consistent with the project provisions we took in the fourth quarter. We had no incremental charges in the first quarter of 2013, and our estimates to complete these projects remain unchanged.

Turning to some of the business unit highlights from Q1 and the trends we see heading into the balance of the year, bookings were generally consistent with our expectations at this stage in the year. We had some key wins the first quarter and few wins that trickled into the April time frame that will be booked in Q2. At Gas Monetization, Q1 job income advanced 32% year-over-year due to strong project execution, increased volumes at several LNG projects, the successful attainment of incentive milestones, and the favorable resolution of a number of project closeout items. Looking forward, we continue to expect strong margins in this business through continued strong project execution, continued mix shift away from lower-margin projects nearing completion, and the potential for favorable resolution of additional project closeout items. Additionally, we continue to have a very healthy pipeline of future prospects.

For the Kitimat LNG project, we are engaged with a customer completing the update up to the FEED analysis and continue to pursue the EPC for the project. We continue to believe Chevron's involvement increases the likelihood of that project moving forward. For the Gorgon LNG fourth train project, extended pre-FEED activities continue, and we anticipate a transition into FEED in the third quarter. For the Tanzania LNG project, KBR continues to execute pre-FEED activities.

For the two additional LNG projects in Canada we've discussed previously, they continue to move forward in various stages. We are executing pre-FEED work and pursuing FEED on one of these projects and maintaining an active dialogue with the customer on the other. In the US, we continue to see substantial opportunities for both LNG and GTL developments. We continue to track opportunities in both arenas and remain enthusiastic that the projects will move forward.

Regarding our other projects in Gas Monetization, at Escravos, we are ramping up commissioning and expect to complete our activities on the project late this summer. At Skikda, we finished strong from an execution standpoint and are pleased with achieving the milestone of delivering first liquids on the project in the first quarter. At Gorgon, we are excessively executing construction management on the project, driving towards bringing the first train online in late 2014. And on Ichthys, we are seeing strong execution and, as expected, an increasing impact to the P&L as the project ramps up. We expect 2013 to be stronger than 2012 and think we will reach peak staffing and progress on the project and 2014 and 2015.

Technology delivered another strong quarter with over 20% job income growth year-over-year driven by execution on the business unit's backlog built over the past several quarters. In the quarter, we also booked a number of new ammonia licensing, engineering, and proprietary equipment projects in Indonesia and Bolivia. We continue to see very robust global opportunities for growth across our world-class portfolio of leading technologies with particular strength in ammonia and fertilizer space driven by powerful project economics.

At Downstream, we continue to see a solid slate of new work in a number of various. Last week, we announced that KBR was awarded a contract valued at approximately $600 million for Dyno Nobel's world-scale 800,000-metric-ton-per-year ammonia plant to be built in Waggaman, Louisiana. This project will be booked in the second quarter of 2013. KBR will provide EPC services as well as technology, license, and equipment for KBR's purifier technology. KBR was also awarded an EPC contractor last week for two new ethylene furnaces using KBR's SCORE technology for an undisclosed client. The contract is valued at approximately $100 million and will also be booked in the second quarter of 2013.

We continue to see growing prospects in the US for additional ammonia, urea, and chemical projects, several of which we have bid or are preparing bids for that we believe will reach FID in 2013. From an execution standpoint, the ethylene project in Uzbekistan is progressing well, as is our Middle East PMC and CM portfolio projects, including the Yanbu, Sadara, and Jazan projects. Additionally, we are seeing increasing engineering work volumes associated with our KBR-AMCDE joint venture.

At Oil and Gas we continue to be enthusiastic about expansion opportunities Shah Deniz 2 in the Caspian where we are performing the FEED and expect to do EPCM for both the onshore and offshore portions of the project as it continues to advance towards FID in the third quarter. Also during the first quarter, KBR was selected by Subsea 7 to perform topsides design for the Chevron Lianzi development offshore Africa adjacent to the Congo-Angola border. KBR is also involved in two floating LNG developments, one with [Hogue] and the other with GDF SUEZ on the Bonaparte project.

At Services, Q1 was solid, particularly across bookings, revenue, and income at our Canada operations where we had a book-to-bill of 1.5 in the quarter and good execution on the strong bookings delivered in 2012. We expect continued robust performance from our Canadian operations in 2013 with a continued flow of new work from the Oil Sands as well as good potential gas and potash opportunities ahead of us. To support this growth we've nearly tripled the size of our labor force in Canada over the past year.

At Power, we continue to position KBR's and EPC Contractor for pollution control facilities and new combined cycle projects where we currently have two multi-$100-million projects out for bid. We continue to believe we have a favorable value proposition for our customers in this space and have plans to bid on two additional multi-$100-million projects later in 2013.

At North American Government Logistics, after a strong finish to 2012, we also secured a few key wins in the first quarter. Among these awards were the Djibouti Based Operation Support Services contract and a task order under the LogCAP IV contract to provide support to the US forces in the Kingdom of Bahrain. The $127-million Djibouti contract is for one base year and three option years, while the $54-million LogCAP IV task order is for one base year and four option years. KBR booked only the base year for both contracts in the first quarter. Sequestration, government budget uncertainty, and a slower award environment remain challenges for North American Government Logistics, but we continue to believe this business has generally stabilized around current levels.

At IGD and SS, we continue to see good performance on the Allenby & Connaught project and on our portfolio of Afghanistan-related projects. As we transition our model from wartime to peacetime activities, we continue to build and develop relationships where our core expertise can be best leveraged. We are excited about number of new opportunities developing for outsourcing opportunities at both the Ministry of Defense and with the local police forces in the UK through public-private partnerships in the UK and Australia, camp support in the Minerals market, and potential emerging opportunities in Libya.

At Ventures, we are seeing some natural gas supply issues at that EBIC ammonia plant in Egypt which impacted productivity. The owners are working on stabilizing supply, but overall, we are anticipating lower ammonia volumes in 2013 relative to 2012. Now, I'd like to turn things over to Sue to discuss KBR's financial performance and outlook in more detail. Sue?

Thanks, Bill and good morning, everyone. Let me summarize our financial performance and then go deeper on some of the key areas. KBR had a solid quarter of execution with job income margins improving 280 basis points over the first quarter of 2012. All of our Hydrocarbons business units plus North American Government and Logistics, Minerals, and Canada improved job income margins versus Q1 2012. Our cost in the business unit overhead in G&A improved $7 million compared to the prior-year first quarter, and our labor cost absorption improved from the fourth quarter of 2012 as expected.

First-quarter revenue was down compared to the prior-year first quarter, consistent with our expectations, primarily driven by lower revenues from the Escravos GTL and Skikda LNG projects as they near completion. We did, however, see solid revenue growth in Downstream and Services, where the Services group was up nearly 40% led by in near-threefold increase in Canada operations. G&A was $52 million in the first quarter as a result of lower incentive compensation expenses versus a year ago and ongoing prudent cost controls in all departments, offset by higher ERP spending. We expect G&A to ramp up as we continue our ERP implementation in 2013.

KBR under absorbed its labor cost in our centralized engineering pool by $15 million. This is consistent with our expectations for labor cost absorption expense to continue to be a drag on earnings through the first half of the year and to gradually improve as the year progresses. We continue taking steps to right size our organization and optimize cost for the levels of work we anticipate for 2013. We made progress in the first quarter, but we still have significant room for improvement, and this remains an ongoing focus for the Company during the balance of 2013.

KBR's effective tax rate in the fourth quarter was 23%, lower than our guidance range of 26% to 28%, primarily due to favorable tax rate differentials on foreign earnings as well as number of favorable discrete tax items and the quarter. As you may recall, the effective tax rate was 9% in the first quarter of 2012, primarily driven by discrete tax items. KBR's backlog at the end of the first quarter was $14.2 billion, down $716 million from our strong December 2012 backlog primarily related to normal project work-off. This reduction also included a negative FX impact of approximately $160 million. Additionally, as you know, backlog to be lumpy quarter to quarter for E&Cs. If we look at our backlog for Q1 and recently-announced bookings in April on balance, the start of the year has been in line with our expectations. As of March 2013, 43% of our backlog was fixed price and 57% was reimbursable, the same mix we reported at December 2012. The types of risks in our backlog are consistent with our discussions on prior calls, with a large majority representing back-to-back contracts, funded contingencies, and KBR Home Office Services.

Turning to KBR's balance sheet, we ended the first quarter in a strong cash position with cash and equivalents of $904 million down $149 million from the previous quarter. Be used $93 million in cash from operations, primarily related to the timing of the ramp up of projects in Canada and the timing of invoices in Downstream. Cash deployment was $33 million for share repurchases, dividends, pension contributions, and CapEx. Also we had a negative $21-million impact to cash balances related to foreign exchange. KBR's networking capital increased $230 million in the fourth quarter -- in the first quarter of 2013, also primarily related to the timing issues described previously. Improving our working capital position going forward remains a key area of focus for the Company.

Let me spend a bit more time on the subject of cash. We have $904 million on the balance sheet, of which $197 million is in joint ventures. The remaining KBR cash is split approximately 23% domestic cash and 77% offshore cash. Our domestic cash is utilized for dividends, share repurchases, capital spending, and US acquisitions. Our International cash is primarily used for operating requirements, capital expenses, foreign acquisitions, and pension contributions.

Before turning the call over to Bill, I would like to make a brief statement on our 2013 guidance. KBR's full-year 2013 earnings per diluted share guidance remains between $2.45 and $2.90. We will provide an update to our 2013 guidance in July. And now, I'll turn the call back over to Bill for his final remarks. Bill?

Thank you, Sue. At this stage in the year KBR's, business is progressing largely as expected. We've had solid execution so far in 2013, and our win rate on new awards has been on par with where we thought we'd be. We continue to see a robust series of new opportunities across each of our 14 market-facing business units. The potential opportunity set for KBR is tremendous, and I'm confident in KBR's ability to successfully win and execute this work both and 2013 and beyond. Now, we'll open the call for questions. We ask that you please limit your comments to one question and one follow-up.

(Operator Instructions)

We will go to our first question from Jerry Revich with Goldman Sachs.

Good morning.

Good morning.

Bill, of the 15 US ammonia greenfield projects that are in the various stages of planning, I'm wondering if you could provide your assessment of how many of those you think actually will move forward, and when do you expect the bulk of those projects to move to EPC?

I think we're still looking at the 12 or 13 with talked about previously. We've seen two move into EPC or go into FID already. And we still think that 6 or 8 of those might go forward in the 2013, 2014 timeframe. And we're looking as KBR not only doing EPC but where it is possible to provide other services. The licenses, we believe we'll be able to maintain our general 50% share of the licensing market, and we'd like to be able to get two more EPCs out of this bulge that we're seeing in the North American market.

Bill, it is been a couple of decades since we've seen a US ammonia new-build cycle. Can you just talk about it in this market, the prospects for the EPC work to be linked to the Technology portion? In other words, what can KBR's market share be on an EPC side, and how can that vary compared to ammonia projects we've seen in other markets?

We are trying to -- and I think we were successful in the discussions with Dyno Nobel in linking the benefit of KBR's Technology with its EPC execution. And in contrast to other parts of the world, we are able to vertically integrate our position in the North American market to do both engineering and construction to support the Technology offering, and so we are trying to create as much competitive differentiation as we can in packaging the amount of project with the EPC. And I think we were successful with Dyno. I can't say that we'll be successful in each time out, but certainly, where we can sell the technology, it's a very good scope of work for us. It certainly has the license, the basic engineering design, proprietary equipment associated with the Technology, and where we can show the customer the benefits of the integrated KBR Technology provision as well as the EPC, we are trying to do that as aggressively as we can. So we are clearly better positioned in North America to do this. We are successful through the announcement on Dyno Nobel of delivering the integrated Technology and EPC, and we are hopeful that we'll have other opportunities to continue to package these two together.

Thank you.

We will take our next question from John Rogers with D.A. Davidson.

Good morning.

Good morning, John.

Bill, just on the ethylene furnaces that you mentioned in the second quarter --

Yes.

I'm sorry I'm not familiar enough with it. But how big is the total project that these furnaces are being used for, and is there a chance to expand your scope there?

Well, our scope on those, John, we commented were right at $100 million for the new furnaces. There is some back end, the recovery section, which is a whole different EPC offering, and it depends on, really, were the client is. We think on this opportunity that our scope will be the furnaces, and I believe they've addressed the recovery section differently. But in other opportunities, we'd like to be able to get into the recovery side as well as the furnaces, but clearly, with our Technology and the ability to do the length EPC, it's a much better opportunity for us to differentiate our offering than the recovery section, which is more generic or vanilla in terms of its ability to be technically differentiated.

Okay, but in terms of the larger ethylene projects that we're reading about, I'm just trying to understand the linkage there and the opportunity for KBR,

Well, on the new ones, we've commented previously that if it's a greenfield project, we are not -- we believe our Technology does have a little bit of limitation in this low-gas-price environment. The Technology is a very sophisticated technology. It gets a very high yield, but the cost of the facility and the cost of the license when one has a much lower natural gas price environment is probably less advantage than in higher-gas-price environment because the premium for yield, the increase yield is not generated. Also, our Technology has been a little stronger on naphtha than on methane, so as we look at some of the greenfield ones where they're starting without any other furnaces or beyond replacements of our existing furnaces, I think we are probably less differentiated than we are where you've got an owner that's very familiar with the SCORE technology, wants to see the consistency of the technology across multiple furnaces, and that's where we see our niche in the ethylene side.

Okay, thank you. I appreciate the clarification. I'll get back in queue.

And we'll take our next question from Andy Kaplowitz with Barclays.

Good morning, guys.

Good morning.

Bill, I know you said you would update us in July, but you know we're going to ask anyway. The EPS range is still really wide, and 1Q would be close the bottom of the range on a run rate basis. You've said before you're expecting improvement throughout the year. We know you want to be conservative because of the problem projects that are not finished yet, but if they behave, could you actually trend to the higher end of the range?

Well, I think Andy, as we've looked at our guidance -- and you are correct, we are not going to update the guidance on this call. What we said at the beginning of the year is our position. We had -- back in the call in February, we had said we believe we had provisioned those projects appropriately. Certainly, if we do a better job mathematically, that could be a positive for us, but that remains to be seen, and our comments today suggest that we are right on schedule with where we thought we'd be with these projects. We also talked about the ramping up of the business, and we said we had to sell work in the first quarter, and we are marching along our steps as we had thought. So how you ought to interpret our comments is we are where we thought we'd be today given our guidance in the first quarter, and without trying to get precise or get outside of our normal practice of updating in July, our guidance remains where it is.

Okay, that's helpful, Bill. Maybe I could ask you your confidence level around backlog over the next few quarters. You did -- you are going to book the $600-million ammonia job. It sounds like from your prepared comments that everything is in line with what you expected, but as we look over the last three months, have you had -- have you seen more activity around medium to large-size projects or less, or is it just right in line with what we thought in terms of backlog growth expectations?

I think, Andy, as we look at the backlog, we are not envisioning big awards, big EPC awards this year. We think this year will be a FEED driven year for us. Given the fact that we are working off backlog on Ichthys that's EPC, and we are adding backlog that would largely be FEED, we probably would expect to see a backlog decline on revenues. But as we look at job income, because we are generally making higher margin on job income on FEEDs and the engineering services than we do on the overall average EPC, we don't see that type of erosion in our job income backlog because of a mix variants as we progress throughout the year. So while we would expect to see the revenue fall off, I'm not sure from a job income standpoint, we would see that fall off at all given the type of work we are expecting to book on the FEED side over the next two months.

Okay, that's helpful, Bill. Thank you.

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

Hi, good morning. Sorry, have to follow-up on the guidance question as well. Bill or Sue, when you guys guided last quarter in terms of how with thought about the earnings first half versus second half, Sue, I think you said $0.90 to $1.10 for the first off of the year, and we're already sitting about $0.60 for Q1, so I just want to understand, is there anything that's going down meaningfully in the second quarter that would imply a $0.30, $0.40 or a $0.40, $0.50 number in Q2? Then my next question relates to Technology where the job income in the margins have been very good. If we think about 2012 versus 2011 and with some of the ammonia projects stuff you are talking about, I'm just wondering if you can help us, whether what type of growth we should see in that in those markets and 2013 versus 2012? Thanks.

Wow, that's two really big questions. Sue, do you want to take a stab at the first one?

Sure.

I tried on the last one.

Well, see, he did say $1 in the first half, come on.

I said $0.90 to $1.10, that is correct.

And we are at $0.60, so the math doesn't work.

Well, what we really did is we looked at it at the entire year and gave our best estimate of the first half. We're really not going to update any of that, but we don't expect to have -- see anything and the second quarter different than the good execution and good the project work that we've seen in the first quarter. So while we're not updating it, we don't expect anything to drop off in the second quarter in terms of our execution and our cost control.

Okay, great. And then just on the Technology side?

The Technology side, Jamie, we had a really outstanding fourth quarter in terms of our bookings on several ammonia plants. We would expect to see those volumes continue to be worked off throughout 2013 and maybe a little bit into '14. We are hopeful that the great sales efforts we are seeing all over the world in ammonia will continue. There does seem to be the continued activity North America. We believe that there are some market rules changes in India that will allow us to see two ammonia plants move forward in India. We see pretty much steady the rest of the world, so we are optimistic that Technology can continue on their growth platform. Now, as we look at margins, we are -- as we expand the scope of our Technology offerings from just the basic engineering and design and license to a package that includes a higher level proprietary equipment, the job income on each of those sales is increasing, but the margins are declining because you're not getting the margins on proprietary equipment that you get on the intellectual property or the basic engineering design. But overall, we are very pleased with the scope expansion that out Technology Teams have driven into our offerings, and we will make more money as a result. We'd be happy to trade off more money in exchange for a little bit lower margin on the Technology business.

Okay, great. Thanks. I will get back in queue.

We will take our next question from Steven Fisher with UBS.

Good morning.

Hi, Steve.

You had called out $38 million or about $0.20 of positive contract estimate revisions in Hydrocarbons and I think specifically in Gas Mon. Could you just talk about what that is? And is that for Australian projects that are ongoing or maybe some of the legacy projects that are wrapping up?

You are referring to some statements we made in the Q about those adjustments. We did see an expansion of our scope of work on Gorgon during the quarter which increased the backlog on the Gorgon project for us. Now, that also had the offset of reducing percentage of completion, and that explains a little bit why minority interest was light in the quarter compared to what we've been running traditionally. So that was an impact. We did have a couple -- as I said, we had our first LNG shipment out of Skikda. That took away some of the risks that we had during the commissioning of the plant. So we had some of the recoveries there, funded liabilities, which were in our budgets for 2013. And we're continuing to work on some of the other items on Skikda now that we're producing gas there. Ichthys and Escravos we are pretty much as expected.

Okay. That's helpful. And then Bill, previously, you'd talked about trying to partner with some of the company's for construction on US ethylene projects where you don't have the technology but you could provide the construction services. Can you give us an update on where you stand with that?

Yes, we are continuing to look at those opportunities, Steve. As we've talked about, our construction-only business, US construction, and we are continuing to pursue reimbursable opportunities until we see a settling down of the Gulf Coast craft market. That's probably been -- I think it's prudent for KBR to date, given the experience we've had in the last two quarters, it may keep us out of a couple opportunities where the owners are looking to get fixed-price construction, but if someone feels comfortable doing the fixed-price construction, then so be it. But we do feel comfortable looking at the integrated EPC and doing our construction there, and we are very pleased with how that turned out on Dyno Nobel. But those opportunities are not as voluminous as would like. A lot of stuff continues to slide, and I think owners are still, from their perspective, doing the prudent things of seeing if in the market, they can get a lump-sum construction for that piece. They are looking for it, and so that's probably taking away some of the opportunities set for us over this year and may affect us prospectively through 2013.

Okay. Thank you.

We will take our next question from Tahira Afzal with KeyBanc capital.

Good morning folks, and congratulations on the good execution.

Thank you.

First question is, I think you, Bill, have already -- I know you have already answered it, but I know you've had good closeout and good execution on a couple of your larger projects. As we look out to later half -- latter half of 2013 and into 2014, is the job income on the Hydrocarbon and specifically Gas Monetization side going to (inaudible) to directionally point up even though we've seen a couple of large closeouts over the last 18 months?

I would say that as we look at the portfolio in Gas Mon, we expect to have FEED awards that will increase volumes at Gas Monetization in the second half compared to first half. Our execution on Gorgon and Ichthys, Gorgon should remain constant, Ichthys should continue to ramp up. We expect that Escravos will complete, but we really haven't had material impacts from Escravos in the P&L for some time now. And then on Skikda, while closes out, we still have some claims with the customer regarding the extension of time and the liquidated damage provisions that we took two years back that we hope now that we are producing LNG to customer will take a more favorable view of our performance and be willing to assess more openly the issues that gave rise to these charges that we took, and particularly related to subcontractors of our customer that we used who had contribution to these delays. So I think you could see some continued momentum and the earnings growth at Gas Mon for those reasons in the second half compared to first half.

Great, thank you. And as a follow-up, the second question is for Sue. You've talked over the last two quarters a little more about you working capital dicing up perhaps the (inaudible) and all. As we look out, is that -- do you have certain milestones we should look forward to in terms of really seeing these materialize in terms of timing?

Sure. Tahira, as we think about what's going to happen in 2013 on working capital and cash flow, all of our businesses are very well aware of where they need to be for the year on these items. We are working hard. We are disappointed that more of it hasn't materialized in Q1, but we definitely are making progress, and again, the Team knows where they need to be in what the problem spots are, and we expect those to be in line with our expectations by the end of 2013.

Super. Thank you very much.

We will take our next question from Brian Konigsberg with Vertical Research.

Good morning

Good morning.

First, for Bill, you did mention this year you don't expect to see a lot of very large EPC projects, but you had been pursuing a handful of sizable awards in the Middle East, particularly on the Oil and Gas side. Maybe you could just give us an update on where you stand with some of these offshore projects like in Abu Dhabi and elsewhere? Are though still viable opportunities for you in '13?

The two projects we are pursuing in the Middle East in Oil and Gas of magnitude were both losses. We were pleased with the commercial offering we put together, and I think we learned some things as an Organization working with Korean contractors that we expect to be able to move forward another bids. Unfortunately, on the larger one, we had the low price after the first round, and there was a rebid, and another party made a dramatic cut in price to jump ahead of us and was awarded the bid. So both those two large efforts were losses, but we took away some positive experiences gained in doing joint EPC with the Korean contractors in the Middle East on Oil and Gas projects.

Got it. Thanks. And just sue, back to working capital, you had been discussing the last couple quarters just about collections from the US government. Can you just talk about where that stands? Are you hopeful that gets resolved shortly? Is that part of the 2013 plan?

It is part of the 2013 plan, Brian, and we're making some progress, but as with most things with the government, it's slow. We expect that some of the funding issues that I described in the fourth quarter call will be easier to get to than some of the closeout activities for -- in [forms one] with the other part, but we do expect to make significant progress in 2013, and like I say, our Team is working that very hard. And we're moving along as we expected we would be through the first quarter.

Got it. Thank you very much.

We will take our next question from George O'Leary with Tudor, Pickering, Holt.

Good morning, guys.

Hi, George.

Just wondered if you could provide a little incremental colder on Kitimat and timing expectations there? Last we had hears, was potentially late 2013. I know Chevron is good for the overall project moving forward, but they're a pretty meticulous customer, and with that review of the FEED, is there a delay in timing around that project?

I think the -- first of all, when Chevron and Apache announced their agreement, there were some time to get in and complete the documentation of Chevron officially joining that venture and the exiting of Apache's two partners. And I believe that is coming to a conclusion right now, which has obviously been an important thing for the owner group -- or the new owner group to get squared away. Chevron is very meticulous, and I think they will pursue the project very thoughtfully and carefully. But given that we are in late April right now and where we are on the discussions, we are ready to go very quickly with Chevron, but from our perspective, if it does slide into first quarter, then that would be -- or later, we are still very interested in the project, and we'll -- whatever progress the owner group wants to move forward, we're ready to go at anytime.

Thank very much. That was very helpful. And then from the Chemical standpoint and Downstream outside of ammonia, what opportunities are you most excited about in 2013, and do you think we could see some more activity around the gas-to-liquids project as we move into '14?

Yes, I do think you could see some more activity on that as we move into '14. We've continued to follow with great interest the developments in gas-to-liquids because we believe through our Pearl GTL experience, we have something to offer that's differentiated of having done one of these of such a large-scale. And even our experience on Escravos is a benefit there because that puts us with two major GTL projects that can go on our resume. So yes, we're hopeful those will continue. Again, the sponsors have to look at what all their issues are, particularly as it gets into the siding, what kind of agreements they have with the local government, how do they want to structure their feet stock off-take contracts? All of which we don't have any perspective as KBR into. But relative to discussions that we are having involving GTL projects, we are pleased with the continued evolution as KBR. And then in the Chemical space, certainly, we are seeing a lot more activity in terms of projects in the US, and we think that bodes well for us because of our ability to deliver integrated EPC services on those projects and our prospect list and principally, our Downstream business looks as strong as it's been in some time, driven by the North American market, largely.

Thanks very much, Bill.

We will take our next question from Rob Norfleet with BB&T Capital Markets.

Good morning, and congratulations on the good quarter.

Thank you, Rob.

Just a quick question, Bill. Recently, Inpex has been saying that they've been seeing some, obviously, challenges and cost inflation at the Ichthys project in Australia, which is obviously not uncommon given the tight wage rates there in that region. When you look at that contract for you all, it's split between fixed and cost reimbursable. just want to understand what your exposure would be, though, given that 75% of the contract for Inpex was structured as six. If there were various wage rate, inflations, or cost overruns, what the impact would be on KBR? What your exposure is there?

We think we've appropriately structured the contract. There is a large reimbursable portion, which it does include the local construction costs for that project. As we've talked on previous calls, the largest part of our fixed-price exposure relates to Home Office Services where we feel we have a very good ability to estimate cost and productivity, and we also have a significant amount of back-to-back procurement that Sue has talked about on prior calls. We see the market as it was when we signed the contract a year ago. We also believe that the situation in Australia is similar to where it was a year ago and that it's perhaps -- Inpex looking at the market and seeing things change, but I don't think the comments they are making are materially different from the comments that have been made by other owners in Australia for the reasons the other owners have made those comments.

Great, that's helpful. My second question, I just wanted to ask about, obviously, the Pemex, the arbitration. Looks like you all have moved past that process into actually trying to see some of the Pemex assets in Luxembourg. Can you talk about what the timing of potentially getting some of those assets would be? And if you do end up collecting cash, what you would envision of that $350 million?

We are -- I think outlined in the Q, we are still pursuing our remedies in New York, and those efforts in front of the judge there continue. We had set of hearings two weeks ago on that that we think went well for us, and we could get a ruling from the bench in the coming weeks or certainly the next few months on that, which would -- could result in the closure of EPC-1. We've been working on the parallel path of Luxembourg for some time now. We believe that the Luxembourg courts have affirmed the arbitration, and that as we proceeded with the banks and the questions that have been risen by the banks to the courts over there, have been addressed as we would like them to be addressed in Luxembourg. It does take some time for this process to work out in Europe, and -- but it does give us a second opportunity to get our monies collected, and certainly, if all else fails, we have the arbitration under NAFTA which we haven't executed yet, but we are still looking to diligently pursue the collection, the monies. When the money comes in if we are successful, the first thing I'm going to do is count it and make sure it is all there. Then we will figure out what's the best use for that. I think Sue has made comments, and I will let her comment again about how we look at using cash, but I don't think we're going to have any kind of different strategy in terms of how we look at cash. Sue, you want to add any thoughts there?

I will second what Bill said. We'd be very happy to receive the cash, and as we look out, and at whatever time it is that we actually receive the cash, we'll do an evaluation of where we are on several different items. So what we normally talk about is operating expenses, dividends, share buyback, and acquisitions being the final piece of that list. So at the time that we would receive those -- that cash, we'd do an evaluation of what made the most sense at that point to time and come out with a communication.

Great, that was helpful. Thank you.

We will take our next question from Will Gabrielski with Lazard Capital.

Thanks, good morning.

Hi, will.

Hi. Can you provide some color around IGP overhead, and just as a percentage of revenue, it's the highest it's ever been, and I don't know how much of that is associated with the federal work versus the other segments, but is there any leverage there that you might have later in the year?

I think so. I think as you look at IGP overhead, it is overhead, and with declining volumes, the overhead as a percent of sales will go up. We are taking out overhead as businesses shrink, and we will continue to do that. We had a, perhaps, greater softness in our Infrastructure business than we envisioned three or four months ago, so we are evaluating where our overheads are and what we're going to spend money on. And we are going to be very aggressive trying to continue to right size that organization. We do hope that we'll be up to grow back some of these businesses so that the overhead as a percent of sales will decline, but we are mindful of the -- particularly in our government businesses as we've shrunk down, that [NAGL]we can show that the overhead has fallen in NAGL over time, but with a lot of the tail issues that we see, it's not a one-to-one shrinkage of revenues and overheads, but we continue to look very diligently at what's the best use for that overhead, and if it's not productive in terms of creating work or we have a reset in terms of the size of the businesses, we will take steps accordingly. And you can go back and look, as I said, at NAGL and Minerals, how we've managed overheads over time, and we'll will continue to be good stewards of that spending.

Okay. Thinks. And then in the Middle East, and specifically Saudi, what type of activity levels are you seeing in GES Plus? And then what's the piece of work like on Jazan and Sadara for your PMC roles?

The GES Plus, we are expecting that grow significantly this year from where we were. I think we ended the year last year at about 400 people, and we are expecting to be north of 600 by the end of the year, which we think is good. On Yanbu, that's going to continue. It is fairly stable at this stage as the project is in construction. At Sadara, we are just now getting into the field. We could see a little bit of growth there as the PMC starts dealing with all the different issues that are attendant to getting into the field on such a large project. Jazan, we're just getting there, and we could see a little bit of growth there. But those are PMCs, and its good work for us, but they are not the same degree of volume that you would expect on an LNG project, for example.

Understood. Thank you very much.

We will take our next question from Robert Connors with Stifel Nicolaus.

Good morning, how are you?

Fine, how are you?

Good. Just related to some of the Downstream units from the ethylene crackers. Seems like the list there is much longer than some of these base-load ethylene plants for things like polyethylene, ethylene oxide, and even some of the on-purpose production plants that are starting to merge. So I was just wondering, are there some of these Downstream opportunities, can they exist for KBR, or are the projects owners looking to give a lot of this Downstream units in-house with EPCs doing the base-load ethylene plant?

I think our prospect list does have those Downstream plants. Doing an ethylene project is a large project by itself, and those could be anywhere from $400 million to $700 million as a rule. I think the other plants are separate enough, and we are seeing on our prospect list those opportunities that tell us that the owners aren't limiting the entire ethylene chain to one contractor, that they want to break it up to just make sure that any one contractor doesn't get overextended and provide the benefit of multiple contractors on site.

Okay. And it seems like your comments about Abu Dhabi that you gave before -- but just recently, we've seen some of the Asian EMCs start to experience a hangover effects of their fixed-price bidding strategies, so I was just wondering if there's pockets starting to emerge where pricing discipline or contracting terms are becoming a little bit more restored in favor of the western EMCs at this time?

Yes. I think when we look at those bids several years ago and saw prices below are direct cost, it was a cause of concern, and there's a little bit of relief that these guys have taken on work very aggressively and that their underlying cost the base is not necessarily different from what our underlying cost base is. I do believe that in the last 12, 18 months, we've seen a better bidding environment, a more disciplined bidding environment and the Middle East. And I'm optimistic that that will continue so that we get a more narrow distribution of outcomes on the awards and not the very dramatic distribution we saw two or three years ago.

Okay. And just for housekeeping, was there an update on the 2013 LogCAP revs?

No. We basically have said that the government businesses are stable at this point with -- and we said that at the end of 2012, so we have not provided specific guidance on LogCAP.

Okay. All right, thanks a lot.

We will take our next question from John Rogers with D.A. Davidson.

Hi. Just a follow-up maybe for Sue. In terms of where you've got an equity investment project like Inpex, how much backlog are you burning out of that project not blowing through revenue?

What we've done, and what we talked about when we booked Inpex specifically, is that we booked the backlog at our percentage of the revenue of the contract amongst the partners. So then what we are doing as we go through and we actually book revenues into backlog, we are also adjusting out through adjustments in the revenue line any revenues that are not flowing through the P&L. So in other words, the equity investment, those may not exactly be equal, and so at any given point in time, you'll have the percentage in backlog that's left on the project.

John, if you're thinking about it from a modeling standpoint, in prior calls, we described the duration of the project, and I ask you to go back and look at that, but if we assumed we said five years, and we assumed a normal distribution on you typical project performance, you can lay out the percentage of completion we're going to see this year, in year number two of five, and be able to look at the work off that would be associated with that normal distribution percent complete. That would be the way I would suggest you all look at that from a modeling perspective.

Okay. Well, I appreciate that. What I'm also trying to understand a little bit is what your pace of bookings are because I can't just net them against the previous quarters. In other words, the change in backlog.

The change in backlog is -- just on a revenue base, in backlog is, obviously, we see that, and it does tell a different story because you are not seeing the challenge that we all faced, and we've talked about it prior, is that with equity accounting, we are taking out revenue dollars in backlog, and they are flowing in on the equity side in the P&L, so you don't see the one-to-one correlation between change in backlog and what's going into the P&L. And believe me, that's why we spent a lot of time last year describing how to think about it in terms of the duration of the project, the normal S curve, so that as you could look at what is really happening in the backlog, that you could get a sense of what was coming on Ichthys, and we've stayed away from commenting specifically on anyone project from a revenue side or a backlog adjustment. And so that's why we continue to refer folks who have questions -- because it is a gap in how you're looking at your model to think more analytically of the normal distribution and percent complete times the backlog that we booked.

Okay. Well, I was hoping to try and figure it out little more, but I appreciate the help.

Some of your peers might just ask us what the number was, and we'd have to politely say, no, we can't say it. (Laughter)

I know. I know. The other question, and I apologize, too, if you said this, but in terms of the embedded margin in your backlog, how does it look now versus the last couple of quarters?

If followed a little bit the falloff in the revenue backlog, John. It didn't fall off 1-to-1 because we added some higher-margin stuff than we worked off, and that was the EPC phenomenon versus adding FEED work in there.

It is about flat with where we ended the year.

Okay. Great. Thank you very much.

This concludes today's time for question and answers. At this time, I'd like to turn the conference back over to our speakers.

Thank you all for joining KBR's First Quarter 2013 Earnings Call. We appreciate your attention. We appreciate your questions, and we look forward to continuing our dialogue with you all as 2013 unfolds for KBR. Thank you, and have a great day.

This concludes today's conference. We thank you for your participation.