KBR Inc (KBR) 2013 Q3 法說會逐字稿

Good day and welcome to the KBR's third-quarter 2013 earnings conference call. This call is being recorded. As a reminder, your line will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time.

For opening remarks and introductions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead.

Good morning and welcome to KBR's third-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 third-quarter results is also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer, and Dennis Baldwin, Senior Vice President and Chief Accounting Officer.

During today's call, Bill will provide an overview of KBR's third-quarter operating results, highlighting a number of key areas from each of our business groups. Dennis will then provide more details on the key financial takeaways for today's call.

Lastly, before turning the call over to 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 can impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's third-quarter press release issued last night, KBR's Form 10-Q for the period ended September 30, 2013, and KBR's current reports on Form 8-K. You can find all of these documents at KBR.com.

Now I will turn the call over to Bill. Bill?

Thanks, Zac, and good morning, everyone.

KBR's third quarter was highlighted by strong overall bookings with a book-to-bill of 1.2 times and a healthy cash flow from operations of $178 million. During the quarter, we had a number of key wins across our businesses and a book-to-bill ratio of greater than 1 in three of our four major business groups.

Key wins included a large DuPont maintenance contract; a $300 million urea EPC project for an unnamed customer; and a polyethylene FEED for INEOS. Additionally during the quarter, KBR continued to make significant progress on a number of key prospects.

First, our IGP business group received a limited notice to proceed on a new $500 million, 600 megawatt combined cycle plant. We anticipate receiving the full notice to proceed by May 2014 when all final regular regulatory approvals are received.

Second, a KBR joint venture has been chosen for detailed negotiations for our large-scale UK government project worth several hundred million dollars. The negotiations for this project are expected to last for several more months. Neither of these opportunities were booked into backlog in the third quarter.

Despite a strong bookings quarter, KBR's third-quarter results were disappointing compared to our expectations. We delivered EPS of $0.16 in the quarter. This includes a tax rate of 46%, primarily resulting from the tax issue with our prior parent, worth $38 million in taxes; $50 million of NCI expense for our partner's equity related to a change order on the Gorgon project; and a continued elevated level of labor cost absorption at $10 million.

We also faced some near-term headwinds from incremental cost related to our Canadian instrumentation of our ERP system, a contract expiration and temporary dry docking of a vessel at our MMM business and lower levels of gas supply and lower ammonia prices at our EBIC ammonia plant. The third-quarter pretax impact of these headwind-related items was approximately $17 million.

Lastly, we saw delay in project closeouts we originally forecast in the quarter that we now anticipate occurring in quarter four. I would like to discuss KBR's operational performance and keys prospects in more detail.

Across the five problem projects we discussed on our fourth-quarter 2012 call, our execution remain within the parameters of the project provisions we took in the fourth quarter and we believe these provisions remain sufficient to see the projects through to completion. We are demobilized at the two Indonesian project sites and the three US construction projects are still expected to be complete by year-end.

At Gas Monetization the bid packages for the Kitimat LNG project have been submitted and we believe Chevron will select the preferred EPC contractor by the end of the year. For the Gorgon LNG fourth Train project extended pre-FEED activities continue and we await transition into FEED.

For the Tanzania LNG project, KBR has completed our pre-FEED activities. For the Tangguh Train 3 expansion, we are in the bid preparation phase for the FEED and provision of EPC pricing which we anticipate will move forward in the first quarter of 2014.

We also continue to track opportunities for additional LNG and GTL developments in North America, and maintain an active dialogue with sponsors regarding these opportunities. Regarding our other projects in Gas Monetization, for the Gorgon project, the project is progressing well and we have achieved additional work milestones.

We also received a scope expansion during the third quarter, which reduced our percent complete for the project during the quarter by about 1%. For the Ichthys project, we are seeing strong execution and, as expected, an increasing impact to the P&L as the project ramps up. We expect 2014 to be stronger than 2013 and think we will reach peak staffing and progress on the project in 2014 and 2015.

At the Escravos and Skikda projects, both projects are in the commissioning and closeout phases and KBR has destaffed our construction teams from these sites.

At hydrocarbons, we are focused on executing on the ammonia and petrochemical work we have recently won as well as continuing to win new work and building strong backlog, based on the industrial renaissance in the US, driven by low shale gas prices. This includes our previously announced Dyno Nobel project.

Additionally, we have won two other US ammonia-related EPC projects, one previously announced ammonia project worth approximately $250 million and one new urea project worth approximately $300 million. We continue to be bullish on the growing number of prospects in the US for additional ammonia, urea, and chemical projects and have several bids outstanding in what is expected to be an active bidding environment for the balance of 2013 and 2014.

We also have a couple of bids outstanding for FEED and PMC work in the Middle East related to refinery and petrochemical projects, and we continue to increase our engineering work volumes at our KBR AMC DE joint venture. Although technology bookings were a bit light this quarter, we continued to see robust global opportunities across our portfolio of technologies with particular activity in ammonia and fertilizer spaces.

Offshore, we continue to perform post FEED and pre-FID activities for the Shah Deniz 2 project and look forward to this project moving forward to FID at the end of the year. We are excited about the progress we are seeing on large-scale FLNG projects and are actively preparing pre-FEED and FEED bids for a couple of potential projects.

We are also seeing increased activity in the Gulf of Mexico. After Macondo in April 2010, drilling activity in the Gulf of Mexico slowed considerably. As we've discussed in the past, offshore activity for KBR occurs after the drilling programs so we are now in the time period where we are actively seeing projects starting to move forward. We see several pre-FEED and FEED project opportunities for 2014 setting up for a larger scale EPC in detailed design work to move forward in 2015.

At Services, we continue to see a robust flow of new work in Canada from the oil sands as well as substantial opportunities from natural gas, mining, potash and SAGD. We have also seen good growth in our maintenance business with the large multi-site DuPont win in the third quarter. We also were able to renew the expired service contract at our MMM business at the end of the third quarter as well.

At our power business, we continue to see solid execution on our SWA and Ghent projects. As I mentioned earlier, we have also received a notice to proceed on another 600 megawatt, $500 million combined cycle power project for an unnamed customer.

We also continue to see a good bidding environment for both pollution control and combined cycle projects where we are building a solid win rate on these projects.

At Ventures, natural gas supply has begun to improve at the EBIC ammonia plant where we continue to see lower ammonia prices. We expect EBIC to continue to see some continuing headwinds on earnings until normal levels of gas supply resume.

When you take a look -- when you take all these moving pieces into account, we expect our 2013 EPS to come in around the low end of our previous guidance range of $2.55, excluding the negative Q3 P&L impact of $38 million or $0.26 a share in taxes related to the prior parent dispute.

From an organizational standpoint, we have taken steps to better streamline our business and focus the organization on selling. To that end, we have organized under four business groups and we have created a position to head up KBR's global business development. With this new structure in place, we will be able to better focus on high-priority prospects, increase client focus, increase sales communication and alignment and optimize our proposal dollars across KBR.

We feel these actions will drive better sales performance going forward, allowing KBR to continue to grow backlog in the coming years and position the Company to deliver strong shareholder returns in the future.

Now I would like to turn the call over to Dennis to briefly discuss a few financial items, relative to the quarter that warrant further discussion. Dennis?

Thanks, Bill, and good morning, everyone. First, I wanted to touch on corporate G&A. Corporate G&A was $66 million in the quarter, up $3 million from the second quarter including $40 million in ERP-related costs. Of this amount about $3 million was additional ERP spend, related to the Canada phase of our ERP implementation which presented a headwind to the third-quarter earnings.

Our expectations for corporate G&A continue to be between (technical difficulty) [$230 million] to $240 million for 2013. However, we anticipate coming in closer to the top end of that range and we now expect ERP expenses to be approximately $40 million for 2013.

Second, I wanted to provide more details on the accounting referees report related to the tax matter with our former parent. On October 11, 2013, KBR filed a Form 8-K related to an unfavorable accounting referee ruling for a tax dispute with our former parent, which determined that KBR owed approximately $105 million. The earnings impact to KBR was $38 million in additional tax expense, net of deferred tax assets in the previously recorded net liability of $30 million. Our balance sheet line item due to former parent reflects the full liability amount of $105 million.

Also, I wanted to briefly touch on the significant increase in our noncontrolling interest expense line. Noncontrolling interest was $63 million in the third quarter. This increase from traditional NCI norms was primarily related to a change order executed on the Gorgon project. As you recall, KBR is a 30% partner in the JV. So 70% of the job income impact of the change order will be a dividend back to our JV partners.

Therefore, the NCI impact related to this change order was approximately $50 million in the quarter.

Moving to labor cost absorption or LCA, KBR continued to make improvements in the underabsorption of its labors costs in our centralized engineering pool. The LCA expense was $10 million in the quarter, down $7 million from the second quarter. Recall the second quarter included approximately $5 million related to shut down costs associated with an office closure. So net of those expenses, LCA was down $2 million, but remained a headwind to earnings in the quarter.

We expect to make moderate improvement on LCA in the fourth quarter and into 2014.

Turning to KBR's balance sheet, we ended the third quarter in a strong cash position with cash and equivalents of $959 million, up $159 million from the previous quarter, based on strong working capital improvements in hydrocarbons, IGP, and the service business groups.

Over the past several months, we have also seen several positive developments related to the Pemex arbitration. In September, a New York Court entered a judgment for $465 million, which includes approximately $106 million for the performance bond and interest confirming the ITT arbitration award. Pemex has filed a notice of appeal and indicated to the court they will post a bond in the amount of the judgment. This bond should be posted by the end of November.

Also as outlined in our Form 10-Q, we are also pursuing collection in Luxembourg and under NAFTA. There were no material changes to these proceedings in the quarter.

Lastly, on backlog mix, as of September 30, 46% of our backlog was fixed price and 54% was reimbursable. This was not a significant shift from the second quarter mix of 48%, 52%, respectively. As we have discussed on prior calls, the types of risks in KBR's backlog include a high percentage of back-to-back contracts, funded contingencies, and KBR home office services. So, in our view the risks are not as high as the percentages of the fixed versus reimbursable might suggest to the surface.

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

Thank you, Dennis. At this stage in the year, KBR's business is progressing a bit slower from an awards perspective than originally anticipated. We have had solid project execution in 2013 and our win rate on new awards has been good and is improving.

We have seen more EPC work in the market compared to quicker burning engineering only work. This has added positively to KBR's backlog, but near-term project earnings on this work and competition for new work may challenge our margins.

However, looking forward, we continue to see several large projects targeted for FID in late 2014 or early 2015 and we are expecting to see an improvement in job income margin bookings in 2014.

On the positive side, KBR continues to win our share of the available work and is well-positioned to take advantage of the mass of opportunities set of new project awards ahead of us. Our strategy is to win and successfully execute this work and we are confident in our ability to deliver strong shareholder returns over time.

Now we will open the call for questions. We ask that you please limit your comments to one question and one follow-up.

(Operator Instructions). John Rogers, DA Davidson.

Good morning. First thing, Bill, in your comments in the press release talked about some job income that had deferred into the fourth quarter and it implies -- your guidance implies -- even at the low end pretty significant improvement in profitability in the fourth quarter. And I am just trying to understand how assured are you at this point that those benefits are actually going to materialize or is it just an expectation that they will? And I have a follow-up.

Well, as we look at it the -- those items -- yes, they are largely related to project closeouts and we see opportunities both in gas mon as well as in NAGL for closeouts in the fourth quarter. I am convinced they are going to occur. There's no doubt in my mind on that and I am fairly confident that they will occur in the fourth quarter, just given where we stand in terms of progress that we are making towards getting these resolved and the issues that lie in front of us.

And in the past you have talked about the job income within your backlog. Can you comment on that at this point?

Yes I think the trend we have seen this year, John, and let's (technical difficulty) stripping away some of the volatility we have in gas mon, which we admit we will have a lot of volatility in backlog and we will focus on the mix of work and type of work that we have. And so we are seeing that the work we are adding to backlog is probably -- is being added at a lower as sold margin than what we are working off. And that is partially attributable to the types of -- to the mix of work and certainly the DuPont award we had for industrial services. Those types of activities trade at a lower job income margin than an engineering-only project.

And then also we have a lot of EPC projects that we have added. We have talked about the ammonia work, for example, where we are recognizing earnings on a percentage of completion basis. And while we are performing the engineering at this stage on the projects, and if we were doing engineering only, we might see work in the mid-teens, we are recognizing earnings on that as a percentage of -- on a percentage of completion basis, where we have the construction services and the percent complete. We have the procurement that has its margins in it.

And so the overall EPC margins that we are seeing on the projects we have signed up are lower than what we would see typically on an engineering-only project or an EPCM type project. And so we are seeing, while we are getting the engineer accomplished on those projects and if they were engineering only they would be a lot higher margin than what we are seeing, it is really the mix of the EPC work that we have signed up recognizing that on a percentage of completion basis, as well as some of the other work in the backlog that is traditionally trading at a lower job income margin than what we are seeing overall.

Okay. I'll get back in queue. Thanks.

Steven Fisher, UBS.

Good morning. Bill, you mentioned that projects are developing more slowly than you had hoped. Can you just talk about what the key drivers of that are today? Is it more overall macro caution or is it more cost increases? Is it that you have to keep going back and reengineering? What is driving that kind of project continuing to move to the right?

Well, I think that the ones we are seeing moving to the right certainly involve -- let's take the category of LNG projects, first of all. There have been a lot of announcements on projects. US Gulf Coast, Canada, East Africa, some continuing developments albeit in a different form in Australia.

And with all of these developments -- again, this is us, KBR, synthesizing a little bit what we hear from our customers. There's a lot of people out there trying to sell LNG to a finite universe of buyers.

And so, [its root] today, it is a buyers market if you will at least as we would anticipate it, given just the broad number of suppliers that are out there and people are having to, as a buyer, look through and see what is going on with the --? Will the project get delivered? Can they deliver on maybe some pricing that they are proposing? What is the timing going forward, who are the sponsors? Are they selling from a portfolio? Or are these asset-only developments?

So I think there is a -- I get the sense there is a lot of noise out there in the LNG space that's -- has created at least in our minds some continuing delay in projects as our customers attempt to develop their offtake agreements and this has contributed to some of the delays.

To a lesser extent, we are seeing some projects continue to look at costs. We are working with some customers to take some of their early stage designs and look at it from a fit for purpose standard as opposed to some of the underlying traditional norms that our customers are using. And I think they are taking a harder look at their projects and trying to make sure they are buying what they need as opposed to maybe what they have historically wanted to design in their projects.

So we are seeing some delays in that regard. But we are working closely with our customers and we have people helping them find those answers to what is needed as opposed to maybe what their historical norms are. So those are really the two big drivers that we are seeing in our space from the delay and awards perspective.

Okay, that is very helpful. Then, 2012, obviously, was tough from an execution perspective. As you are about to book a large presumably fixed-price power plant, what actions have you taken following those 2012 operational challenges that might improve KBR's ability to execute projects like this?

Well, I think when we look at those projects, we have to go back and try to sort through what were the triggering events on in the US side that gave rise to that and certainly these were construction-only projects in a geographic area that saw sudden increases that we had not forecast to occur as early as they did and cost and per diems that actually led to some productivity challenges we found on those projects.

In other parts of the country, we continue to execute very well construction-only projects and they did come in at as old profit objectives. What we have done when we look at projects on an EPC basis, we have a lot more levers to pull to manage things with respect to overall project delivery. We can source materials differently. We can move construction guys to different work fronts, based on what we see coming ahead of us. And so as an EPC provider, we have got a much better view of the entire project execution of equipment and construction materials that we didn't have under the construction-only projects.

The other thing that we are looking at is, where are the projects that we are bidding and, again, we are being very cautious in geographic areas where we have seen the volatility of construction labor per diem some productivity. But in other parts of the country where we have not seen that type volatility, we have gone out and feel more comfortable about quoting EPC. And in some cases, we have engaged third-party subcontractors to perform construction services across the different grades where we don't have as strong a direct hire capability and they have been very comfortable in providing us the assurances that we are looking for in terms of the price for labor per diems and productivity.

So we have taken the lessons learned from last year. We've identified geographically what those drivers are and then, we think, those geographic issues we found and we've reflected that in our bidding. Now as we look at some other projects that we haven't woe, we have taken -- those have been also in the areas where we have had the construction labor and per diem difficulties, and we have taken a more conservative approach to those.

So, I think we are doing the right things. We are being thoughtful about where the projects are, relative to competing work in the geographic areas. We are being conservative where I think it is prudent for KBR to be disciplined and conservative and, in other areas where we don't see these issues arising, we are also looking at considering third parties to provide various labor to us that can manage that and pass that risk on to those third parties.

Great. Thanks. That was helpful. Thanks very much.

Andrew Kaplowitz, Barclays.

Good morning. Bill, we know you don't want to give 2014 guidance at this point, but maybe you can talk about the puts and takes we should think about that would allow you to grow EPS. Do you need to win another big project or two to materially grow EPS? Or could you do it with excess growing your small to midsize project work and then maybe Shah Deniz being awarded by the end of the year?

I guess you are right, Andy, I won't comment on 2014 guidance at this point. But speaking of what are we trying to achieve here. We are clearly in a position where we still see headwinds on labor costs absorption. The growth on Ichthys is not going to help that because our work on Ichthys is largely fabrication and construction oversight and our partners are doing the engineering there.

So we do need to either fill up the shop that remains open. We do need to sell some more EPC work or large project work.

We are seeing a good flow of activity in the $200 million to $400 million range that we have talked about on our comments or $200 million to $500 million. Shah Deniz, while the pre -- while we haven't moved into FID, we have got several hundred people working on the advanced speed of that.

So we are not going to see a big pickup on Shah Deniz when that hits FID. There will be a pickup, but we do have a lot of folks that are continuing to drive the momentum of execution for Shah Deniz and we will add more folks to that as we move into the FID phase.

So we really are at a position where we don't have a large anchor project in KBR at our -- either our Houston Resource Center and our London Resource Centers. I am pleased with where we are in that situation given what we have been able to sell with the midsize projects of $200 million to $500 million and we will continue to look at how we position ourselves for more work on these larger projects that are on the horizon for us, and fill in the gaps where we can with the other work in our power business and our hydrocarbons business and continue to drive shareholder value that way.

Okay, that's helpful. Just shifting gears. Maybe you can give us a little more color on the competitive environment in the sense that you mentioned in the release this time that you were seeing these near-term pressures, but certainly when we step back, what we see is some of your competitors starting to win some big work.

And so it is surprising that you haven't seen any improvement in the environment yet. And maybe do you expect to see improvement in the competitive environment as you go out over the next year?

Well, I think we have competed on some of those projects that we were not successful on and we have taken, as I mentioned in the earlier question, we think, a thoughtful view on how to manage construction and productivity risk in the US Gulf Coast where we see a very volatile environment.

It remained to be seen where the whole Gulf Coast sourced out in terms of construction labor and the volatility that we have seen in the past on that. But I do think that, in terms of the amount of awards that we have seen, it has been a slower award environment than what we had expected or have seen historically. And I am throwing the global KBR into that because it is not just the US that we are seeing. We play across the Middle East, Australia, Africa.

And so, from our standpoint it has been relatively quiet and that work that has come out has been, I think, pretty heavily contested to the credit of our customers who obviously are looking to get the best value they can for their capital projects.

So, when I talk about the competitive environment, the awards that are coming out is a little slower than what we have seen historically. The competition is a bit higher, and so, there is the headwinds on the work that we do win it is at some pretty competitive margins. We have good margins that we can execute, but it is still, I think, a competitive environment.

Okay. Thanks. Appreciate it.

Jamie Cook, Credit Suisse.

Good morning. Two questions. First, one thing that strikes me about 2013 is the level of project closeouts, the positive contribution from project closeouts that will help 2013.

And so as I look out over the next year or so in addition to the headwinds you mentioned to Andy, I guess my other concern would be 2013 would be an unusually high closeout year. So my question is is that true? So that is an additional headwind we have as we look out over the next 12 to 18 months? Or would you consider 2013 a normal year that you would have just as many opportunities over the next year versus you had this year?

And then I guess my second question is you mentioned vendor selection from Chevron on Kitimat. Can you talk about any update on how you think you are positioned on that project? I feel like the vendor selection thing is new. Originally, I think you said November. Now it is late in the year. Has that gotten pushed out and what your view is on Kitimat? Thanks.

Okay. On the [2000] closeouts, we have always had project closeouts and then changes that we have reported and regarding LD's project closeouts, et cetera.

I think what we have seen this year is probably higher than normal. Just given my intuitive feel that I haven't gone back and taken a study of what closes out. Certainly you have got changes in projects that we continue to work through and then also some very longer dated projects, [that can skate to] in Escravos that have completed construction this year and you see that winding down in the revenues for gas mon. And as you get to the end of these projects that you do have opportunities for closeouts and adjustments and we think we do a pretty good job of being conservative in how we book projects and provision them over the life of the project.

So from a lifecycle standpoint, we in 2013 we probably have projects closing out to a higher degree than we have seen in prior years. We have announced a bunch of several projects that are EPC, but I don't see them closing out next year. So I think next year on a relative basis, we will have fewer closeouts than we have seen in 2013.

On the Kitimat project, yes, there's -- it is still the two parties that we understand there's still two parties participating. We have continued to have a dialogue with the owner group. There is a lot of information that has been provided, a lot of discussions on not only financial, but technical and certainly contractual terms. And so our best guess today is end of the year they will have a preferred EPC contractor selected.

Just one other question. You mentioned in your prepared remarks that I think you now have a new head of development. You have realigned the businesses. And I guess my question is, what was the primary decision that drove that? If you think about how the market views KBR, they view KBR is at a competitive disadvantage in the United States and is this your way of saying, well, maybe there were some opportunities that we missed for whatever reason. We are making the changes to right -- you are making the changes to, I guess, fix that. So if you could just comment on that, what drove the changes there?

Well, I think what has driven the changes has been the fact that we have been able to bring in some really good people into the Company in the last two years. And so, as we've -- and you see that reflected in our revisions to our financial statements where, with some very good people, we have brought in, I can look at things across business groups and let's focus on business units.

So that has been the primary organizational change. And I do think breaking out gas mon as a separate group, given its complexity and size, it does provide a better bandwidth management for the four key group executives we have at KBR.

From a sales standpoint, we can always do better. I don't think we are disadvantaged in the US. I just think that, as we have matured as a company, we used to talk a lot about business development oversight and controlling the risk we are bringing in the portfolio and I can say that we are doing a great job as a company. We can declare victory on what we wanted to achieve in terms of looking at projects, making sure we are the best in class in risk awareness.

And so it is time now for us to evolve as an organization that we can take our foot off the brake a little bit on this and push more down on the accelerator. And that is why we are going to spend more time emphasizing sales, while maintaining same level of thoughtful control and discipline in our bidding.

So the first one is recognition of the executives we brought in. I am very pleased with that. That is probably the biggest change. And then the more subtle change in the organization is the fact that I believe that the organization has, in the last several years, achieved what we wanted to achieve in risk awareness and in how we are bidding and how we are executing. And so we are now able to focus more on driving the organization to a better sales performance and sales focus while maintaining that good discipline to the bidding environment.

Thanks. That is really helpful.

Jerry Revich, Goldman Sachs.

Good morning. Bill, you mentioned in your prepared remarks US LNG and PTL projects that you are competing for and working on or hoping to work on. Can you give us a sense for the project you are focused on? When are those expected to reach final investment decision in the US? And I guess presumably you did one of the import terminals that is now a brownfield. How should we be thinking about the timing as you see it for whether you are selected?

Well, on that general comment I made about US GTL and LNG projects, we don't have permission to disclose any of the work we are doing. We are on one project working with a customer to as I picked up in an earlier comment to get fit for purpose on their overall design to help them get to a what is a necessary capital cost as opposed to what some of their historical norms might have been that have driven cost higher from their internal estimates. So we have got a bunch of folks working with the customer on one of those projects to help them get to the necessary capital cost.

The other projects we are working on, they are at various stages. I would say that the former probably you could see some FEED activity in 2015 as we complete our near-term activity. Excuse me, FEED work in 2014 as we complete some of the near-term study work.

But a lot of the other stuff is going to be late second half of 2014 or 2015 in terms of when they achieve their FID just given the aspects of what they have got to conclude in terms of LNG sales and other commitments they need to get to, to move their projects forward.

And then for the technology and the EPC opportunities you see in ammonia, you spoke about four projects in the past. Looks like you have converted a couple of them. Can you give us an updated project count that you are focused on and you mentioned soft bookings in technology in the quarter. I am wondered is that a timing issue as you see it, based on the ammonia work?

The technology bookings, I think, was a little bit of a timing work. We are still forecasting internally that we are going to be on target with where we expected to be at the end of the year. Third quarter was below our budgets, and so they are anticipating a recovery to get to the 2013 targets that we have.

In terms of the ammonia prospects, we have been really successful on Dyno Nobel and, then, the two ammonia and urea EPC projects that we have announced on an unnamed basis. We continue to track three or four more projects that are in various stages of development. We feel really good about our position on those.

Again, it is when those projects are able to achieve their respective FIDs I think we will have more to talk about. But we continue to track three or four fairly closely at this stage.

Vishal Shah, Deutsche Bank.

I wanted to better understand your service backlog. I know you showed nice growth in bookings in the service business. So curious to see whether this kind of a run rate is sustainable going forward.

Also in the IGP segment so I can be -- you said in the [bid] business has stabilized, so can you provide some more color on what do you see in that segment? Thank you.

In the services backlog, I am not -- I will try to address what I think you were asking about sustainability. We did continue to get -- obviously we got the very large DuPont booking this quarter which we are going -- that is a multi-year contract and I don't expect us to be able to book one of those every quarter. I would like to be able to do that, but reality is it is a one-time booking that we will have other bookings over time, but not that large.

So with a little bit of a blip there in terms of the other businesses and services we have had, we are continuing to see some recovery in the building group. We have had some good bookings continue in Canada on our work up in the oil sands. And also the fabrication work that we are doing, we seem to be doing very well in delivering modules that are built to design and fit up issues are minimal, and we seem to have gotten more than our share on modules and hope we can continue to maintain the very good performance we have in our module fabrication yard up in -- yards up in Edmonton.

And IGP, you know it's -- we are thinking that we are still seeing activity in the US government, very competitive. The last couple weeks with the government shutdown were not helpful, I think, to the entire space in terms of new awards or moving things forward. We have had some good awards in Djibouti, in Romania. We continue to see some good work. We continue to make the Navy's global construction program MATOC deal.

We have got some good prospects for continued growth in our UK business. Maybe it is rolling over the work we expect to see fall off in Afghanistan and on the first phase of the Allenby & Connaught project. So minerals and infrastructure in Australia, we think, have bottomed out and we hope to see some recovery there next year.

And then power continues to, I think, be well-positioned. The award that I alluded to that will get booked between now and next May is a continuing indication of a stronger business for KBR in power and we hope to be able to continue to see growth within that segment of IGP.

That's helpful. Thank you.

Brian Konigsberg, Vertical Research.

Good morning. A couple of questions. You talked about the closeouts into Q4 and you expressed your confidence in that being executed. Can you quantify how much you anticipate that will contribute? Maybe not exactly, but a rough range.

No, I really can't at this stage. I think we obviously have some matters on some projects that we have talked about previously that we think will get resolved. And then we have others that it is just not appropriate at this time to talk about, given where we are in our reviews and discussions.

Right. And secondly, on the problem projects that occurred late last year and you have been performing well on this year, are you anticipating you can get some clawback in costs in Q4? Is that baked into your assumptions?

No, it is not. Those projects, I believe, Dennis, are accounted for as lossmaking projects under [81 1] and so we've got a mark to market accounting essentially on those projects. You may want to comment a little bit about how the accounting drives us to not have things out in the future, but today.

Well, yes. We have made provisions for those losses and those projects are tracking to those provisions. So we booked the accounting based upon our best estimates and the projects are tracking according to those estimates.

And if I could just slip one last in. So the ERP spend in 2013, obviously a little bit more elevated. I know you don't want to give that, the guidance for 2014, but do you think that it could trend lower next year?

I think ERP overall is going to be up year over year. We are going to roll out the United States implementation next year.

Canada was a good pilot for us. It is a big business, but it is also one that touches a lot of different elements of what KBR does from procurement to human resources to project management. And so, we will have some comment in our guidance about ERP in the 2014 guidance but North America will be the big rollout year. And then we will pick up the rest of the world over the following year and a half.

Thank you very much.

Tahira Afzal, KeyBanc Capital.

Good morning, gentlemen. First question is, if I look at your commentary and the competitive landscape as you have indicated. Is -- are you just seeing a more aggressive bidding environment? Or are you -- is there something in your cost structure that is a little different to some of your peers as it stands right now?

And I guess I am asking this because you are sort of pointed out as maybe one of the top three if not four on the modular construction side. So with like to get an idea whether this is just aggressive bidding or is there something else going on?

Well, our data is limited by what we see. I know that in the projects we have bid, those that we have won and those that we have lost, they have been very competitively contested. I believe that as we look at the level of award volume that we see over the last quarter or so, that it has been probably a little bit lighter than what we have seen historically in the States and you all probably have a better view of that than we do.

But it appears to us, given the dynamics that we are seeing, that there are fewer projects out there being competed than what we have seen in the recent past. And that has contributed to, what I think, is the competitive environment we are seeing today.

And if you look at your free cash flow, clearly still solid, would you comment a bit on directionally what we should expect going forward? And really cash allocation, you said, is going forward. Thank you.

We have spent a lot of time working on the working capital. We still have, I think, some opportunities both in gas mon and in NAGL to continue to drive, improve cash flow in those businesses just given the timing we are seeing to get invoices paid.

From allocation standpoint, I don't think our allocation of cash has changed from our prior commentary and we remain focused on being good stewards of cash. And we hope to be able to continue to have those programs that allow us to take our excess cash that we don't see being needed in the deployment of the business and returning it in various forms to shareholders as we have done in the past.

Thank you.

Will Gabrielski, Lazard.

Good morning. To take that point Tahira was just touching on a little bit further, you guys have a pretty clean balance sheet and presumably you are going to collect a fair amount of cash over the next year. Not only from operations, but also hopefully from the government and hopefully from Pemex, have you guys given any thought to jumping in front of that and taking advantage of cheap credit as an opportunity to raise some capital to get out in front of that and buy back stock ahead of what sounds like you think will be a better award environment 12 or 18 months from now?

We are pretty conservative. I don't know that -- no, we have not. We really will look at what cash we have. We continue to manage the business conservatively and we kick around ideas like that, but I don't see our capital allocation and sourcing cash changing in the near term.

Okay, fair enough. When you talk about it still being competitive or there being less projects to bid on maybe than there have been historically, is that maybe a function of the type of project that are happening in the US that you find yourselves less interested in or competitively at a disadvantage versus what has happened prior cycles? Or do you still feel that is just a broad market statement that there's not enough activity and too many players chasing too few projects?

I think it is more the latter. I don't see where KBR has any disadvantages or competitive issues in the North American market. I think it actually -- relative to other geographic markets, it is actually a stronger basis for our ability to compete just given our ability to do integrated EPC work, and I think we have been successful signing up over $1 billion this year between the three ammonia plants that we spoke about.

I think it is -- you have got a lot of activity out there. A lot of people talking about with different folks on LNG and GTL projects, and those things are moving at the speed they are going to move at. As much as we and our brethren in the space would like to get those accelerated, they will go forward when they are able to go forward, based on decisions taken by our customers. So we are being as supportive as we can, helping them address issues that we can help them and for a lot of the issues, we are simply a spectator.

And that has obviously taken a lot of focus of our customers. They are making, looking at very large projects that, I think, play to a KBR strength and until those things finally start dropping into FID, it is going to be a lot of looking at other projects that can come forward to maybe take their places in our respective backlogs.

Okay. Then, lastly, on hydrocarbon margin. Do you think you have found a bottom here for that business or does mix continue to serve as a headwind to the percentage margin even if the EBIT dollars are growing?

That's a hard one because you have got a number of -- we are looking at just EBIT dollar -- EBIT dollar in aggregate. That is how we are trying to manage the business. And it goes back a lot to the comments that I made several years ago on Skikda. While Skikda was a low margin project it was a great project from an earnings standpoint and a risk standpoint. We have got some -- we continue to have a number of initiatives in oil and gas that are project delivery that are clearly going to have a dilutive effect on the margins we have historically seen.

But I think in terms of aggregate dollars, they are going to be far better for us than what we've been doing in the past. So I am excited about where oil and gas is going. We have seen downstream margins continue -- slide a little bit from where they were when they were just doing engineering projects and PMC project in the Middle East to doing EPC work largely in the US. That is going to drag margins down.

But it is all driven by how do we get the highest dollars that we can for the risks that we are taking. And I am very pleased with the directions both downstream and oil and gas are taking or have taken regarding getting work that is going to increase the overall profitability of KBR on a risk-adjusted basis.

I think technology will continue to perform and they do a great job of expanding their offering with respect to new features. We will probably see perhaps some lower contributions as a percentage of the overall dollars on license fees and probably higher proprietary equipment sales which trade at a lower margin. But again, you could see a situation where all three of the hydrocarbon businesses see their margins go down, but see some significant increases in the amount of dollars they are bringing into KBR, which -- from our perspective we are more interested in dollar drivers as opposed to margin drivers.

And I agree. Okay, thank you.

Rob Norfleet, BB&T Capital Markets.

Good morning. Most of my questions have been answered, but just one. I wanted to look at you all obviously cited that you expect the existing backlog, about half of it, to be burned off over the next 12 months. Can you talk about outside of that contribution to revenues over the next 12 months, what are the other opportunities in terms of quicker burning engineering-only work maybe that we could expect to see hit to fill in the gap?

Well, I think in terms of the backlog, we could only bid on what our customers want us to bid on, not what we want to bid on. I mean where there are opportunities to bid engineering only, we are being very aggressive and I think being really proactive to get those type of just home office service-only opportunities into the fold. And we are seeing those. But we are also seeing probably a greater proportion of the work that we are pursuing on EPC.

And if you look at an EPC project and throw in the procurement and I think we have talked about power, for an example, that you may see high single digits, low double digits on those kinds of margins. And those are going to be lower, certainly, than what you see on engineering only. But you are going to have a longer tail on those earnings. So we would like to get as much near-term backlog, but we are at the mercy of what our customers want to buy, not necessarily what we want to sell.

Okay, that's clear. Second question gets back to something Tahira asked earlier. It is regarding in some ways and contracts that you have not been successful in winning. Again I guess one thing that I wanted to just get your thoughts on, it seems like customers are at least gravitating more towards the joint venture concept, the consortium of two to three players versus the one contractor going at it alone. And it seems things like this has allowed some players to come in fairly late into the FEED process and then be very competitive in some of these contracts.

I know you guys have utilized the JV structure, obviously, in some contracts. But it seems like you do go at it alone a fair amount. Can you talk about that from that standpoint?

Yes, our logic is very linear in that regard. We look at a project and the first question we ask is can we do this by ourselves. So we go through a series of screens or gates that -- you get a project that is $15 billion. We probably say, no, we can't do it by ourselves and so we move down to the next question of are we better off with a partner. And even if we believe on some of these projects we can bid those by ourselves, we still ask the question are we better off with a partner from a risk-sharing standpoint or a skill set capability or any number of features and we look at what do we think is the best solution for us to win.

And on certainly the Kitimat project, we have a partner on that one. We talked previously about partnerships we have with JGC on both the PETRONAS FEED as well as the continuing work on Tangguh.

We look at the larger projects that we are pursuing. They typically have partners with us on those and so we continue to look at what does it take for us to be most competitive on these projects and make our decisions based on the highest NPV for KBR, taking into account either a go it alone approach or go with a partner.

Great. That was helpful. Thanks.

That concludes today's question-and-answer session. Mr. Nagle, at this time I will turn the conference back over to you for any additional or closing remarks.

I would like to thank you all for joining us and we look forward to speaking with you soon. Thank you.

This concludes today's conference. Thank you for your participation.