KBR Inc (KBR) 2014 Q1 法說會逐字稿

Good day. And welcome to KBR's first-quarter 2014 earnings conference call. This call is being recorded.

(Operator Instructions)

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

Good morning. Welcome to KBR's first-quarter 2014 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 Stuart Bradie, President and Chief Executive Officer, and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call, Stuart will begin with opening remarks. Brian will then cover the quarter's results and our market outlook.

Please refer to the accompanying presentation that is posted on our website at KBR.com. After our prepared remarks, we will open the floor for questions.

Before turning the call over to Stuart, 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 first-quarter earnings release, KBR's earnings presentation, KBR's form 10K/A for the period ended December 31, 2013 and KBR's current reports on Form 8-K. You can find all these document at KBR.com. Now I will turn the call over to Stuart. Stuart?

Thank you, Zac. Good morning, everyone. It's my great pleasure to be on my first earnings call as KBR's President and CEO. I'd like to take this opportunity to make some initial comments on why I joined KBR, and to touch on what will be some of my initial areas of focus.

Prior to even being approached by KBR, I recognized that KBR has a rich and proud history with a long list of awards of projects, a high degree of success in technology, and obviously a strong commercial history. But fundamental to KBR's success is the quality of our 27,000 people located across the world. And I am honored to lead such a prestigious organization.

As great as this organization is, however, I recognize that KBR has faced, and continues to face, some recent challenges. My focus since arriving a whole two and a half weeks ago is however entirely on the future. My goal is to put this Company on a path that delivers value to our clients as well as our shareholders, by designing and building world-class projects in a safe and economic manner. A fundamental principle continues to be captured by the simple term KBR -- We Deliver.

I approach this task with a sense of urgency. Over the coming months, I will be learning more about our global operations as I travel the world, and will be leading an in-depth strategic review of the Company and how best we can address the markets we serve. Once completed, I will share KBR's strategic direction with you and also expect to be able to return to our previous practice of providing earnings guidance to investors. It is my privilege to be here with you today, and I look forward to getting to know you better in the coming months.

I will now turn the call over to Brian. He will run through the presentation of discuss our first-quarter results. Brian.

Thank you, Stuart. And good morning, everyone. Thank you for joining us today. Referring to the presentation, I will start on slide 3.

Obviously an overview of the first quarter, you know now that the CEO is in place, and as we announced in the press release, Stuart and the rest of the team will be undertaking a strategic review of all of our businesses. With the filing of now the Q for the first quarter as well as the 10K/A we have previously filed, we are current with all of our financial reporting to the SEC. Obviously the Q1 results were adversely impacted by the Services and IGP groups, while the Gas Monetization and Hydrocarbon segments continue to perform well.

The Canadian fabrication and modular assembly contracts remain challenging with a $41 million loss for the quarter. And the EPS translated into a loss of $0.29. Clearly this is below our expectations. However, our strong cash balance or approximately $1 billion at the end of the quarter allowed us to return some cash to shareholders.

We paid the normal quarterly dividend of $12 million, and we bought back $56 million worth of shares in the first quarter and $94 million year-to-date. And the share repurchase obviously was stopped prior to we learned about the problems we had in Canada. However, the Company's current market position remain strong and we have a very good pipeline of pre-FEED, FEED and EPC opportunities into 2014 and beyond.

Turning to slide 4, and specifically let me address the Canadian pipe and modular assembly contracts. These are seven contracts that are a unit rate structure, which are unique to our business in Canada and that were signed in 2012 through December 2013.

Now these contracts represented significant sales growth, approximately double the revenue that the business had previously undertaken. And also the modules that we signed up for were larger and more complex than what we had done in the past.

Costs in general in Alberta have increased for us as well as others, but we also had significant productivity challenges in our modular assembly yard relating to these modules. We found that we had insufficiently trained personnel on the ground in Canada to deal with this increase in sales growth as well as the complexity of the modules. And that's project managers, project controls, accounting and the executive management professionals that we had in Canada. And also unfortunately, we were slow in identifying and communicating the accurate estimates during execution, and this is what led us to the restatement that we have previously filed.

Four of the seven contracts are largely completed. One project was initiated in late December 2013, and that obviously would translate into a Q1 event rather than the 2013 activity that we had previously reported. And that project has roughly $10 million of the $41 million loss for the quarter. The balance of this loss relates to increased quantities on one of these unit rate contracts. And typically when quantities increase, it's an increase in business for us, but if you're in a loss position because of the cost and productivity issues that I previously mentioned, obviously the loss widens. Most of the client drawings on this project have now largely been issued, so hopefully the commodity, or the quantity risk is largely behind us.

When we first announced the issues in Canada, we also mentioned that we have one master service type agreement which allows that client the right, but not the obligation to place additional work with us. We received no additional work from that client in the first quarter or frankly through today. And we are in discussions with that client about amending the terms of that existing agreement. You see the financial impact outlined in the chart below, and the results of the first quarter are obviously in our consolidated results.

Moving onto slide 5, looking at the first-quarter results. As expected, with no major LNG EPC type awards expected in 2014, our backlog declined for the quarter. However, we are much more optimistic for our second quarter, particular for Hydrocarbons, both upstream and downstream opportunities as well as the IGP segment which we announced that we received the full notice to proceed on Marshalltown the 650 MW gas-fired power plant for Alliant. So we expect the bookings to be higher obviously in the second quarter than they were in the first quarter.

The gas monetization on the two LNG projects in Australia remains very strong, and we received the preliminary closeout on a legacy LNG project, and we have included $33 million pretax gain in the consolidated financial results. I will refer to it as a preliminary closeout because although we have reached agreement for most of the issues with the client, we have not yet finished the project, and we still have people below us, subcontractors and suppliers that were closing out purchase orders and agreements with them. And I also wish to comment that in 2013, there was a $30 million improvement in the profit on gas monetization due to some cost improvements on existing work.

The underperformance for the quarter was in the Services business primarily with the Canada fabrication I previously talked about, but we also had $8 million to close out two of the US problem construction contracts that we had talked about in the past. IGP was adversely impacted from a decline in new bookings during the quarter, but also from charges on some legacy disputes of $14 million. I'd like to touch on this latter point in a little bit more detail.

We're trying to commercially resolve some of our legacy disputes rather than seek resolution exclusively through the legal process, particularly on disputes with major clients. Now, this may result in reduced recoveries from what we had previously recorded on the balance sheet, but we believe it will result in cost savings on future legal fees that are typically recorded as a period expense. If we are successful, it will bring resolution to these matters quickly and it will improve the timing of any cash flow.

However, I want to be very clear that when we believe there are unsubstantiated claims against KBR, we will strongly defend our shareholders' interests, and if the commercial settlement route is unsuccessful, we can always return to the legal process to resolve the matter. But that resulted in $14 million in charges on the IGP, and we also had some within the Hydrocarbon segment for the quarter as well.

Moving onto slide 6, speaking about the segments. The revenue declined primarily because of the reduction in gas-to-liquids and LNG projects in Africa that are either completed or nearing completion. And we had an increase in the hydrocarbons revenues because of the increase in the EPC ammonia and urea projects that we have ongoing within the US.

In terms of the profitability, I mentioned the $33 million gain in gas monetization previously, but in hydrocarbons we continue to see the mix of profits or margins being different on the full EPC contracts compared to prior periods when we did much more in the way of technical services. We also had $8 million in lower earnings on two of the Middle East projects from 2013, and we also had an increase of about $3 million in proposal expenses and $9 million higher cost on two EPC projects. About 50% of that $9 million was for one of these legacy disputes that I articulated earlier and the balance being on another project that is nearing completion.

The IGP segment decreased primarily because of reduced volumes on the LogCAP III and IV contracts, as well as the $14 million in charges I previously mentioned. And Services in addition to Canada, and the problem of the US construction contract, the MMM joint venture that we have in Mexico to do offshore maintenance, the two ships were primarily out of contract for most of the first quarter, and therefore resulted in a year-over-year decline of about $7 million. Those vessels for MMM are now back in operation.

Turning to slide 5, looking at the market. We have a lot of activity underway I should say within our gas monetization segment. You see we commenced work on the Shell global LNG frame agreement, which we believe will lead to future EPC opportunities, and we have a number of pre-FEEDs, FEED and EPC opportunities as listed on the slide.

We are about to bid three multibillion-dollar EPC contracts, and you see the three listed below and their expected dates. However, we also would like to point out that the earnings that we expect to hold throughout 2014, but will be lower in 2015 compared to 2014 because of the timing of the new EPC awards.

So Stuart's telling me I missed a slide, I am sorry. Something out of order. I missed slide 7. Something happened technically here, and it jumped to slide 8, so I apologize. Again, the gas monetization activities remain very, very positive for the future.

Turning back to slide 7, where I should have been, cash management and cash allocation remain an area of focus. As you can see, we had approximately $1 billion in cash, and we articulate on the slide where we have allocated capital during the quarter and year to date. I want to point out since January 2007, we returned $885 million to our shareholders. And so far this year, we bought back about 3.4 million shares under our repurchase program. You see the capital expenditures about $15 million, which included about $9 million of our ERP spend.

Moving on to slide 9, Hydrocarbons back to the market outlook. We believe we're well-placed for a number of offshore engineering opportunities particularly in the UK, Norway, and the Gulf of Mexico. The FLNG market is still rather active, and we have opportunities there. We've won multiple refinery FEED projects in North America which positions us well for participation into the EPC phase.

We have three ammonia/urea EPC projects underway, and we believe there are other opportunities coming in North America. We expect to see opportunities in the ethylene derivatives industry in North America, and our technology folks remain active throughout the world again with a particular focus on ammonia, and we are continuing to see expansion opportunities for ongoing downstream and offshore work in the Middle East.

Moving onto slide 10 for IGP. IGP has some good growth opportunities in the international government markets, particularly in the UK, and continued movement within the US power market. Our Aspire or Allenby/Connaught joint venture in the UK is nearing the end of its construction phase in 2014, and we will continue with the services phase for approximately the next 27 years or so. So that's a good annuity tail to the construction work that is nearing completion.

But we have multiple additional growth opportunities in the international government services business particularly with the UK's Ministry of Defense, but also with police support services, training and other outsourcing activities in the UK as well as other countries throughout the world. We have a number of US government overseas military sustainment opportunities in process, and we recently booked a new base operating support agreement in Bahrain. As I previously mentioned, the IGP group booked the Marshalltown power plant that we had been working on for some time.

Turning to slide 11, the Services group. Again, there are opportunities there in the North American construction and industrial services market, but this business remains very competitive. The Mexican offshore business continues, and the contracts in place for these vessels typically are in three-year increments and are reoccurring.

We are well capitalized or well-placed to capitalize on our activities that we have ongoing in the industrial services market in Saudi Arabia. However, the Canadian market is attractive to us, but we obviously got to get our situation clarified and fixed with our pipe and modular assembly work in Canada.

So in summary on slide 12. 2014 is clearly a transition year, but we will be launching a new strategic review of our business. However, KBR remains a strong global company with a diverse portfolio of businesses, technical capabilities, and a very strong and technically savvy staff. We plan to capitalize on areas of our core strength, LNG, hydrocarbons, and international government services. We have a large number of pre-FEEDs, FEEDs and EPC bids in the gas monetization and hydrocarbon businesses, and the cash management and allocation of capital will continue to be a focus.

Once we complete the strategic review, we anticipate being able to return to providing earnings guidance to you in the near future. With that, that concludes our prepared remarks, and we will open it up for comments.

(Operator Instructions)

We will take our first question from Jamie Cook of Credit Suisse.

Hi, good morning. I guess two questions, and one is for Brian and then I guess one is for Stuart. Brian, I just wanted you to address the guidance because you said steady earnings through I think 2014 and then 2015 should be a down year.

So one, you didn't make money in the first quarter, so is it ex the charges that you had? Could you give a little more color? And I guess while I understand that the big gas monetization project opportunities are more of a 2015 EPC opportunity, is there not enough opportunities in IGP or in Hydrocarbon or in your other businesses to help the earnings trajectory, or does that imply the margin profile and the backlog is just that bad?

And then I guess my second question, Stuart, while I understand you've only been at KBR for two and a half weeks, you are an industry veteran. So my question to you is, I'm assuming you did a lot of due diligence in terms of going to KBR. And based on your customer conversations, what is the view on KBR? Because the concern from the Street is that KBR has lost its game or has lost people or is at a competitive disadvantage, and it will probably not be one of the beneficiaries of the whole gas cycle. So just your thoughts there and whether the management issues will result in you guys probably winning less work than KBR would have historically.

Jamie, first of all, let me address the earnings. Maybe there is a miscommunication or I misspoke, I'm not sure which. I was referring to earnings being down in 2015 exclusively for the gas monetization business, not the consolidated results.

And that's because the rundown in the two large LNG projects this year and the timing of new LNG awards, EPC LNG awards in 2015, the timing as such for those new awards that they will not offset the rundown. As you know, Gorgon is in the back half of its lifecycle, and it's reaching the peak or nearly at the peak. So exclusively to gas monetization, it will remain a strong, profitable business, but it will be lower in volume in 2015 than gas mon is in 2014.

But I guess, Brian, my concern would be the other businesses in the first quarter. And I understand there's charges in there, but it doesn't give you a lot of confidence that that business can -- the profitability can start to improve. So what gives you confidence?

I think again as we were commenting on our position in the marketplace, and the hydrocarbons business is growing, has increased year over year. The EPC margins are lower, I understand that, but we have plenty of opportunities in both upstream and downstream to continue to grow. And the technology is a very steady, profitable business.

So those two businesses are very, very well-placed. The international government business, as I mentioned before, I think there are plenty of opportunities to grow there, and that is frankly more profitable than the business that we have had historically in the US. Services, like I said, we have some challenges in Services, and the driver will be in 2015 those other segments in terms of growth. Let me hand the call back over to --

One question before you hand it over to Stuart. How do you feel, because the other concern is you've been on board since the fall, and Stuart just joined two and a half weeks ago, besides some of the issues that we had today, how do you feel about the inherent profitability of what's in backlog? And what's the risk that we have more charges to come?

I'm comfortable with what we have in backlog other than the Canadian projects, and even there we are hopeful that that's behind us. But I can't guarantee that. Obviously you know that as well as anyone.

Some of these charges that we've taken are on problem projects that are now over, some of them are on some commercial disputes that we're taking a differing view on, and we will see how they play out and will see if we are able to have some upside on some of these. So I don't view there being additional charges to come.

If I thought there were additional charges to come, obviously we would've taken in the first quarter. That's what the accounting requires. So again, I go back to we are well-positioned in the marketplace, and I think the company has a history of being able to execute well, and there's no reason why we can't.

Okay. Thanks Brian, and then Stuart?

Yes, thank you for introducing me as a veteran. The level of work that's coming through KBR from end business to Granherne is very high levels. The growth in the Hydrocarbons business and really KBR's position in that sector demonstrates I think that there is no discerning market view on that side of the business.

And I think what you're seeing in the LNG market in terms of timing of awards is exactly that -- it's timing of awards. So I don't know where you're picking up the sentiment that KBR is not well-placed to pick up work in the oil and gas hydrocarbons, LNG marketplaces. I think I would have to say the opposite to that.

Okay. Well, the concern just because we haven't won anything yet, I guess that's where the concern is coming from relative to the peers.

I mean there's a number of things that have come through the Hydrocarbons business in the second quarter as well that you will see coming through in the earnings as we progress through the year.

All right. I will get back in queue, thank you.

Thank you Jamie.

We will take our next question from Jerry Revich of Goldman Sachs.

Good morning.

Good morning Jerry.

Can you talk about where are you in the receivables review process? It sounds like the Canadian cost overruns issues might've come up as you were working through that process. Are you through with implementing the type of changes you are looking to put through across the Company as you think about fulfillable practices, and are you comfortable that we are not going to have any other similar issues like the Canadian project?

Well yes, I'm comfortable we're not going to have issues like the Canadian projects throughout the Company. We spent a lot of time and effort internally reviewing what we have and processes that we have in place.

And these projects in Canada were unique to Canada. We don't do pipe fabrication and modular assembly elsewhere in the world within our own shop. So I'm quite comfortable we don't have that same situation somewhere else.

In terms of the receivables, we review the receivables on an ongoing basis. The difference is, if you want to call it a philosophical difference or maybe a slight change in direction, and trying to resolve things commercially rather than through arbitration or litigation, yes, that is relatively new. And that is something that Stuart and I reviewed within each of the businesses, and we believe it's a more prudent approach to take.

So in my view, it's more of a timing issue if we reduce the estimated recoveries of these receivables today and forgo the legal fees going forward, we get either to the same spot or maybe even a better spot versus keeping a larger balance on the books, spending the legal fees in the future as a period expense and then waiting for a resolution two to three years down the road. But receivables is an area as part of our cash management we focus on routinely, and the businesses are looking at every day.

Okay. And Stuart, can you just talk about on the Lake Charles LNG project, are you bidding on that in a partnership with Technip? And also can you just weigh in -- on the last LNG cycle, you had a very good partnership with GDC.

You still have one more project that you are jointly bidding on, but can you talk about which of your peers you see building closer partnership over the coming years? And Stuart, perhaps it's too early to ask that question, but would love your broader thoughts around that issue.

I think you're right. We had a very historically -- and still do -- a very close relationship with GDC. We're working with them in the ongoing LNG projects, and their partner in bidding Pacific Northwest, and historically the projects in Indonesia that are coming up with we have been positioned well with GDC and done that work and will continue to work with them in that arena.

In terms of our competitors and how they're lined up, you have to talk to them about that. I don't think it's for us to comment. I think we're working hard on Lake Charles, and yes, we're partnering with Technip on that who executed -- we did the pre-FEED and Technip did the FEED, and so we have a lot of knowledge on that project to take forward into the bid.

Thank you.

We will hear next from Steven Fisher of UBS.

Hi. Good morning. Stuart, probably a little too soon to ask you about your expectations for the strategic review. But maybe what will be fair is if you could talk about were some of the major initiatives that you implemented at Worley that you think might think be value-added at KBR.

I think it would be too generic an answer. I think probably just returning to the strategic review that I'd rather talk about KBR than I would about what I did in my past.

Looking forward, the intent on this is that on timing, if you like -- it's probably worth giving some guidance on that. But the view is that we started the strategic process, it will take a couple of months to bed down and really looking at what are the attractive businesses for the future for KBR where we can be differentiated. And as a consequence, the barriers to entry are high and the terms are more attractive.

And that's where the focus will be, so it will be a focus on quality of earnings as well as much as anything and ensuring we've got a differentiated position in attractive markets of the future. That will then -- we work that through, and our intent would be to make sure we are coming back to you I guess in the later part of this year such that we can provide earnings guidance going into next financial year.

Okay. And then just curious to your thoughts on risk management. I mean how much risk do you guys feel comfortable putting in the backlog at this point? And I know prior management has sworn off fixed price construction only scopes, so I guess I'm curious for your thoughts on that as you pursue some of these LNG bids in particular.

That's good question. I think our risk processes are -- what I've seen over the last couple of weeks are actually very well holding -- it's quite a stringent process that the Company goes through to weigh up its risks and quantify them.

In terms of lump sum construction in its own right, I think we will be staying away from standalone lump sum construction contracts. In terms of looking at the larger LNG opportunities I mean, the way those that we looked that and were not even close to signing contracts on them, so it's difficult to really give you detailed information about the liability associated with the construction elements of that. There will be some elements that are clearly wrapped as a lump sum, and there will be some that move just given the gestation period and longevity across these contracts.

So I think our appetite for risk is in a word would be one that we can manage, and we're not going to take something on that we feel is something we can't manage going into the future. That encapsulates a whole bunch of different aspects from the labor markets to the procurement cycle to how to define the engineering as the point of putting a lump sum price on the table and et cetera. So it's a very difficult question to answer specifically on those LNG jobs just from the cycle we're in today.

But I would add, Steve, for my part, we do have several EPC contracts that are underway in the US, some on the Gulf Coast where we do have construction responsibility, and although relatively early in the construction phase, those projects are going relatively well. So the Company does take fixed-price construction risk in certain cases, and as Stuart says, this will continue to be an area where we will be in discussions with our partners and clients about risk allocation and what we take or don't take.

But I think would be wrong to come away to assume that we do not and we will not take construction risk. We do take some that we think is prudent.

But we won't take into the future standalone construction risk. If we're involved in the engineering and the procurement and the overall project management, that is something we feel that we can manage, when it is just a standalone construction within our services business, we've seen a number of these US contracts that Brian referred to earlier that didn't go particularly to plan. So we won't be doing that again.

Okay. Great, thanks a lot.

Thank you, Steve.

Next we will hear from Andrew Kaplowitz of Barclays.

Hello, good morning. This is Alan Fleming standing in for Andy today. Brian, maybe I will start with a question for you.

Labor cost under-absorption has been an issue for you guys over the past 12 to 18 months, and this quarter it looked quite a bit better than at any point I think probably since early 2012. So how much of this was some of the low hanging fruit in terms of costs that you've been able to take out of the business, and how much better can absorption get this year and into 2015?

Well, that's a great question. We've been talking about this the labor cost absorption obviously since I've gotten here and well before I got here. If you recall on the prior calls, we had talked about reducing the staff levels throughout the world to match the workload that we had, but there was a secondary phase dealing with more of the tougher costs to reduce, fixed-price costs such as rents and like.

We have continued to work on that, but more importantly we've continue to work on winning new work and the chargeability factor, and that has improved on both ends. We should say the cost reductions have continued, but the chargeability has also improved.

Clearly, for it to continue to improve, we need to continue to win new work. And as I mentioned we are well-positioned to do so. How good could it get? I'm accustomed in my career to seeing that labor cost absorption be over-absorbed. So if you get significantly better. But it really comes down to doing the blocking and tackling. Selling new work, and keeping your costs reasonable for the peaks and valleys that occur in this industry.

Can it get significantly better in 2014, or is that significantly better in 2015 and beyond?

I don't want to characterize it or quantify it I should say, it certainly could get better in both 2014 and 2015.

Okay. I appreciate that. And if I could ask you about the three large LNG projects you are going after, two in North America and one in Indonesia.

Can you talk about those confidence in those pursuits and what's different about your approach on these projects versus, say, Kitimat because I think investors seem skeptical that KBR can win another large LNG job. And so you can be more aggressive on these bids than you have been in the past? And do you need to be more aggressive?

I think it depends on how you define aggressive. The answer to the question is yes. But it doesn't necessarily mean to say that you have to be commercially aggressive.

And I would add that the feedback on Kitimat I think we talked about in the past wasn't so -- it was a reimbursable contract. It wasn't so much terms and conditions per se or being more aggressive on terms and conditions that was the deciding factor. Our understanding is that things were extremely close in the evaluation, and there were other factors other than when you're looking at a fixed-price type contract in what the determination on the client side was.

So I don't agree with the thought that we cannot compete and we cannot be successful in pursuing these LNG projects. We are very, very successful in pursuing the work that we currently have and executing it well. There is no reason why we can't do that in the future.

Okay. I appreciate it guys.

Thank you.

We will hear next from Tahira Afzal from KeyBanc Capital Markets.

Hi. This is [San Alam] on behalf of Tahira. My first question is regarding the booking cliff going forward. Can you please comment on that and the correction you expect in the book to bill ratio?

Okay. In general, we have said that our backlog will be down year-over-year through 2014. And that's because of the LNG projects. We are currently executing two, we are finishing up a third, and we have a gas to liquids project that's also virtually complete. And no new EPC bookings in 2014.

Those projects and that business is so large, that it is very challenging for the other segments to offset the decline. So year-over-year we would expect backlog to be down, which is no different from what we had previously been saying.

When you look at the other businesses though, the Hydrocarbons business, I'm much more confident that we could have some growth in backlog or breakeven, on year-to-year. But given the strategic review that we talked about earlier, I'm not going to comment too specifically in what we expect backlog to be. And the same with the IGP, we just booked the 650 megawatt power plant, they have some other opportunities that could be booked this year on the government services side, so we could see the possibility of an uptick in their backlog.

Services is a little bit more challenging until we go through the review and get the pipe fabrication, that modular assembly business stabilized a little bit more challenging to predict what that business activity will be between now and the end of the year. So the core businesses remain very confident, but LNG the bigger bookings would not come until 2015.

Okay. I thought that. In my second question is have these statement impacted customer perception of the Company?

Not that I have heard. I haven't had any feedback positive or negative frankly from any of our folks who deal directly with the clients.

No. Likewise.

Okay. And last question is on the FLNG projects. Can you throw some color on the prospects and the opportunities you see in that space?

And I don't think we want to talk about specific prospects just given the phase of where they are in their development cycle. But we are involved in a number of very early-stage development of these projects in terms of Pre-FEEDs and moving into the front end hopefully in the next while. And there's a grow number of them -- it's a market that is growing, and KBR comes with all the requisite skill sets to be able to differentiate themselves in that market.

All right. Thank you. Thanks for taking my questions.

Thank you.

We will hear next from Vishal Shah from Deutsche Bank.

Hello, this is Susie Min for Vishal Shah. Thanks for taking my question. I guess I want to go back to the backlog comment.

I know in the past you've said you expect increased backlog and bookings and the other segments except for gas mon. And bookings this quarter was pretty low, so it would imply a pretty large ramp. Could you maybe give a little bit more color on whether you still think that holds true and I have a follow-up question, thanks.

Okay. Again, back to the gas monetization, no, that will continue as is. That will be down year-over-year. Hydrocarbon is much more opportunity for maintaining backlog or slightly growing backlog.

IGP is a little bit more challenging. It depends on timing of some of the awards later on in the year, which could or could not happen in 2014. But certainly the activities on the government side is quite positive, a little less optimistic on the power side maybe than we were at the beginning of the year, but they have good opportunities as well.

So Services is the one that is very difficult for us to comment, and my prediction on Services would likely be down year-over-year just given the fact that we are focused on stabilizing a business and we need to do that before being out aggressively seeking new business for that pipe fabrication and modular assembly business. The construction business though in Canada and the industrial service business in Canada continues to perform reasonably well, and we think there are opportunities there. Whether they are going to be able to grow the backlog is too early for me to say at this point.

Okay. Thanks, that's really helpful. And then in terms of the bidding environment, how competitive is it, how should we think about what the margins for these projects could look like compared to what you already have in the backlog?

Yes. There should be -- in general there's not a shift, a major shift in market conditions, if that's what you're implying by that question. It should not be significantly different.

Remember though on the Hydrocarbons with the EPC business we will have lower margin given the construction element of that work versus a pure home-office type service business where the margins are only on our technical services which tend to be higher. So you have a mix issue within Hydrocarbons, but if you compare EPC contracts within Hydrocarbons, I don't think you're going to see a significant move one way or the other.

Yes. Understood. Thanks for taking my question.

No problem. Thank you.

We will hear next from Martin Malloy of Johnson Rice.

Good morning.

Good morning, Marty.

Could you provide us with an update on your current thinking on capital allocation policy given the strength of the balance sheet? Could we possibly see KBR looking at a larger share repurchase program?

Well, as we've mentioned in our prior call, we announced a $350 million share buyback. We always have the maintenance program in place to recover shares to cover the long-term incentive compensation that are given to employees.

So those two plans still remain in place. We bought back $94 million worth of shares earlier in the quarter, so we are fulfilling our statement that we said we were interested in executing a share buyback plan.

At this point in time, we're not announcing and we have no intention of announcing any incremental share buyback plans. We have sufficient firepower to do so should we wish. But beyond that, I'm not going to comment any more specifically about what we may or may not do in advance of any share buybacks or not share buybacks. Just given the sensitivities and being in the marketplace, I don't think it's good for the company to be telegraphing advance to other traders what we may or may not do in that regard.

But I can tell you that capital allocation is an area that Stuart and I spend a fair amount of time discussing already about what my thoughts are, what his thoughts are, and it will remain an area of focus. And clearly part of the strategic review will dwell upon exactly that, what do we do with what we have a strong balance sheet.

So as I said in the past, my thinking is everything is on the table. We consider all of our options when we look at capital allocation, and I don't think anything has changed in that regard.

And then you spoke about some optimism for growth in the hydrocarbon segment. Could you talk about outside of the US, what you're seeing in terms of demand, geographic areas types of projects that may provide you with some optimism outside the US?

Yes, I mean we are seeing a [five year] level of activity for KBR under the marketplace in general around the UK and the Norwegian continental shelf. We've recently announced the award of the FEED contract for the Maersk Culzean project in the North Sea and are working with Statoil in a number of things that are happening in Norway and obviously working with the other IOCs and ongoing projects in the North Sea. So the level of activity around the UK and the Norwegian continental shelf is very wide.

East Africa is also extremely buoyant, and there is a lot of activity across Mozambique, across Tanzania into Uganda and less so but some in Kenya, so lots of activity happening there both in LNG and in offshore. And the deepwater markets in Angola continue to offer up opportunities as well, and then our activities in the Middle East particularly around United Arab Emirates continue with some focus, and, again, there appears to be significant projects moving forward in that arena. And we are reasonably positioned on a couple of those.

The markets in and around Australia are probably more suppressed, and albeit that things like FLNG and I guess the offshore side of Hydrocarbons continues with some activity, the onshore LNG projects that we're doing right now. There are very, very few new ones coming through in Australia because of the high capital cost that is being seen there.

So that's probably just a run through of the world, and the other area is in Latin America where activity in Mexico it's well-publicized in the Mexicans are trying hard to establish a basis of investment for their oil industry, so following on from Brazil. So there's activity all over the world, and other than I think probably the Australia onshore big project gas arena, the activity level remains high.

Thank you.

Thank you.

We will hear next from Will Gabrielski of Stevens.

Thanks, good morning. When you talk about gas mon earnings being flat for the rest of the year, is that off of a run rate that includes that $33 million, I will call it nonrecurring item that impacted 1Q favorably, or is that off the $111 million you reported from EBITDA standpoint.

Obviously we're not that have the $33 million every quarter. But we still think there are some other opportunities to improve upon I guess what you refer to as the run rate. So no, we will not get $33 million every quarter, but we still have the opportunity to close out additional items on that one particular contract, and there may be some additional opportunities throughout the year.

But what I was trying to get to is the core earnings from the two main LNG projects that are underway will continue to be strong. Both Gorgon and the Ichthys project continue to go well, and they will go well into 2015.

That's what we're trying to communicate. But the year-over-year will not be higher, and that's because of the lack of timing of bookings of EPC contracts in 2014. And we won't actually execute enough of the new ones in 2015 to get any significant earnings from them in 2015 to offset the ramping down as the Gorgon one in particular heads toward the back end of its life cycle.

Okay. Can you also help with Allenby and Connaught? As the construction piece winds down, is there any way you can help quantify the size and impact of that on numbers or how quickly that fades away or is it already gone?

No, it is still ongoing. But I don't want to be specific about an individual project's earnings per se. I think more importantly though is there are a number of opportunities, similar opportunities, in the UK and possibly elsewhere where can do other contracts like that, where we can partner with someone, have a joint venture and execute construction or other type of activities and then have a tail for services.

So it's not so much the Allenby Connaught project being the only one out there. There are other structures within the UK and some other countries where we can do similar things.

Okay. That's helpful. The MMM or MMM vessel that you own in Mexico, I feel like that that is a headwind more often than it's been a tailwind, and we don't think about modeling those specifically or I don't anyway.

But they do seem to poke their heads up more regularly over the past few quarters as a negative. How comfortable are you that you need to even be in that business? How strategically core is it to your relationship with that customer, or is that something you are very confident is going to be fully utilized now on a good consistent basis going forward?

I guess there's two questions you asked in the one. I think from a strategic viewpoint, we will look at that as part of the strategic review and tell you after we've done that review rather than say on the fly here. So we will come back to you with that.

In terms of it being reported in the last few quarters, that's quite correct because we were out of service. They've recently gone back in service on three-year term contracts, which is I think historically has been the norm. And so other than figuring out where we would go strategically with that business, I think you would probably hear less about going forward.

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

Thank you, good morning.

Good morning, Brian.

Just on gas mon again. Just trying to think about the trajectory there. You did about $400 million of revenue in the quarter; you have a couple of things still winding down. Are we thinking the run rate into 2015, not including the potential wins on the other LNG projects you identified, is $1.2 million or does it ramp down even more meaningfully than that into next year and be buffered a little bit by the potential awards?

I don't think we're going to give specific guidance about what the revenues may or may not be of any segment, so I'm going to pass on that until we get back into giving some guidance. The quarter is primarily driven by the performance on the two LNG projects we have, and the closeout on one of the older projects.

There still is some revenue going through from two of the projects that are closing out, but it's really the Gorgon and Ichthys projects that really drive the earnings of gas mon. And as we said, Gorgon is past its peak, so it's coming down in terms of volumes of business where Ichthys is still ramping up or near its peak.

But the lines just won't cross, and we won't get enough earnings from the new jobs in 2015 to offset the ramp down on Gorgon, but beyond that I just can't be more specific at this time. When we come out of the strategic review, we determine what guidance we will give, then maybe we will give you a little more color on that.

Fair enough. And then just on employee turnover, retainage, I just want to get a sense of has that been picking up over the last couple of quarters just given the disruptions within the business we've seen? Are there incentives being put in place or maybe you could give color on that. Is that a concern of yours that needs to be addressed?

I think looking after your people should always be at the top of your list for a people business, that's for sure. And I think that, yes there are retentions, there's some retention plans in place particularly in the project levels for key people, and that's being looked at continuously.

Our turnover rate varies significantly across the world and really is driven by the markets in which we operate. The UK market at the moment is good, but it's not half as hot as the Houston market for example where the turnover is a bit higher than it is in the UK. So it's something that we monitor consistently and something we work hard on. Is it a concern? No. Is it a focus area? Yes.

And I would add that I don't think this is only a KBR issue particularly in the Houston market. I know a fair amount about some other E&C companies in the market, and there's a fair amount of movement. To Stuart's point, I think it's a lot more market-driven than necessarily KBR driven.

If I could actually sneak in one more, just about the recoveries. I guess I'm just trying to gauge how big that might be. I mean, what are the assumed recoveries that are sitting in the balance sheet right now?

And just to be clear, I mean are those items that had been recognized as revenue and profit in historical quarters that has been maybe sitting in the unbilled receivables account that I guess you're reevaluating that may turn into a charge if you assume it's not recovered. Is that the way I should be thinking about it?

And separately, I know the account actually the earnings in excess of billings actually ticked up in Q1 even though you recognized a bunch of charges in the quarter. Does that illustrate that there is some more potential costs that are being disputed between you and customers that might need to be I guess transitioned into a charge if a resolution isn't made? Okay.

First of all, in terms of the unapproved change orders in billings, I'm trying to recall exactly which footnote it is, but there is a footnote that specifically details that. It's part of I guess footnote number 5. So you can see the detail there. And there's also footnote number 6 where we have the long-term claims and receivables which is primarily the EPC E1 project with the dispute ongoing with Pemex as well as the government disputes that we've had and the IGP power.

I look at not one particular line item on the balance sheet as I think you reference. I look at more when I consider the working capital accounts. If you look at the receivables, the cost in excess of run bills I think you refer to it, the accounts payable and the billings in excess. We were actually slightly better. We're down about $23 million from those same accounts as of year-end.

So we've had a net reduction of working capital. And that's an area that I'm focused on and an area where I think we still have additional opportunity to improve our cash flows on. I don't think you should look at just one item on the balance sheet because costs move up to accounts receivable, and payables, the billings all interact with one another, so I think you should look at them, those four accounts on a net basis.

That concludes today's question and answer session. Mr. Bradie, at this time I'd like to turn the conference over to you.

I would just like to close by saying I look forward to meeting all of you in passing over the coming few months. Thank you very much for listening. It was a difficult quarter, but the future is very, very positive.

We've got a lot of work to do, I don't think anyone disputes that, but there's a huge commitment, and the people I've met in the business so far are absolutely passionate about what they do and where the business is heading. So without saying too much more at this juncture, thank you for your time and we will talk again soon.

And that concludes today's conference. Thank you for your participation.